Basis

Definition of 'Basis'


1. The variation between the spot price of a deliverable commodity and the relative price of the futures contract for the same actual that has the shortest duration until maturity.

2. A security's basis is the purchase price after commissions or other expenses. Also known as "cost basis" or "tax basis".

3. In the context of IRAs, basis is the after-tax balance in the IRA, which originates from nondeductible IRA contributions and rollover of after-tax amounts. Earnings on these amounts are tax-deferred, similar to earnings on deductible contributions and rollover of pretax amounts.

Investopedia explains 'Basis'


1. As there are gaps between spot and relative price until expiry of the nearest contract, the basis is not necessarily accurate. In addition to the deviations created because of the time gap between expiry of the futures contract and the spot commodity, product quality, location of delivery, and the actuals may also vary. In general, the basis is used by investors to gauge the profitability of delivery of cash or the actual, and they also use it to search for arbitrage opportunities.

2. This figure is used to calculate capital gains or losses when a security is eventually sold.

3. Distributions of amounts representing basis in an IRA are tax-free. However, in order to ensure that this tax-free treatment is realized, the taxpayer must file IRS Form 8606 for any year that basis is added to the IRA and for any year that distributions are made from any of the individual's Traditional, SEP and/or SIMPLE IRAs. Failure to file Form 8606 may result in double taxation of these amounts and an IRS-assessed penalty of $50.



comments powered by Disqus
Hot Definitions
  1. Passive ETF

    One of two types of exchange-traded funds (ETFs) available for investors. Passive ETFs are index funds that track a specific benchmark, such as a SPDR. Unlike actively managed ETFs, passive ETFs are not managed by a fund manager on a daily basis.
  2. Walras' Law

    An economics law that suggests that the existence of excess supply in one market must be matched by excess demand in another market so that it balances out. So when examining a specific market, if all other markets are in equilibrium, Walras' Law asserts that the examined market is also in equilibrium.
  3. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will respond similarly to a marketing action. Market segmentation enables companies to target different categories of consumers who perceive the full value of certain products and services differently from one another.
  4. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following:
  5. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option is purchased and the lower premium option is sold - both at the same time. The higher the debit spread, the greater the initial cash outflow the investor will incur on the transaction.
  6. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious debt when government leaders use borrowed funds in ways that don't benefit or even oppress citizens. Some legal scholars argue that successor governments should not be held accountable for odious debt incurred by earlier regimes, but there is no consensus on how odious debt should actually be treated.
Trading Center