What is Disposition
A disposition is an act of getting rid of an asset or security through a direct sale or some other transfer method. Insider trades often report a disposition of a certain number of shares to board members and executives, which simply means that they have sold the assets in question.
BREAKING DOWN Disposition
Specifically, the act of disposition is literally getting rid of an asset through either a sale, assignment, or by transferring it to another person or organization. Assets, even an equity position in a publicly traded company, go through disposition when an investor gets rid of it. The most common form of disposition is selling stock through a brokerage firm. However, there are other ways to dispose of an asset through disposition.
Normal Disposition or Sale of an Asset
Disposition is the technical term that refers to the selling of stock in a publicly traded company in all cases. When an investor sells a piece of equity, he is giving up ownership of those shares, transferring ownership to another investor or organization. Any time a person buys stock on a public exchange, an act of disposition occurs by the selling party.
The term can also be used to encompass the sale of shares or equity to collateralize a loan with a lending institution. If an investor has a margin account, for example, and a broker sells shares within that margin account, it's considered a disposition of equity.
Disposition Through a Transfer
All investors have the option of transferring ownership of shares to another person or organization. In some cases, people transfer shares to a charity to reduce capital gains tax in the current tax year. This transfer would be considered a disposition of shares. For example, if an investor purchased a block of shares for $1,000 and then transfers it to a nonprofit when the shares are worth $10,000, the investor would not pay capital gains tax on the $9,000 gain and would also be able to write off $10,000 as a charitable donation.
Disposition Through Assign and Transfer
It's possible to transfer equity ownership to a trust, a corporation or a person's family. When this type of disposition occurs, the investor transfers his shares through the act of assigning them to a person or entity and thereby legally documenting the transfer. This transfer legally occurs through an agreement where the shares are literally assigned to someone else. In unique circumstances, an investor may be legally bound to assign shares to another person if specific call and put options are purchased.