DEFINITION of 'Free Right Of Exchange'

An investor's right to transfer an asset to another party without incurring any transaction fees on the exchange. Unlike a sales transaction, the investor is either giving away or trading stock and should not be taxed on the transaction.

BREAKING DOWN 'Free Right Of Exchange'

The free right of exchange plays an important role in the gifting or donation of stock. Making a charitable donation of stock will allow you to avoid any capital gains tax that has been accruing on the asset because the transaction is not taxable as a sale.

Exchange funds capitalize on the free right of exchange by allowing investors to trade larger holdings of a single stock for diversified units in a portfolio. Because the stock is swapped, no transaction or sales costs are associated with the exchange. This allows an investor to balance his or her portfolio while avoiding capital gains tax.

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