Carry benefits is the term used to describe a situation where the benefits gained from holding an asset – such as interest payments or dividends – exceed the costs associated with holding on to the asset, such as storage or financing costs. It is the exact opposite of cost of carry, which is when the costs of holding an asset outweigh the benefits gained from holding the asset.
Benefits of Holding an Asset
1. Avoid investment mistakes
Holding on to an asset (especially for an extended period of time) allows investors to ride out any temporary periods of decline in the asset’s value. When an investor stays invested in a stock, it goes through periods of ups and downs, but if they invest in a stock that is traditionally known as a high growth asset, it helps to balance out any investments that hit hard times and go into a downward trend. Therefore, holding on to a high growth investment will let you correct some, if not all, of your past investment mistakes.
2. Dividend payouts
Some investors buy and sell stock in the stock market to earn a profit, also known as a capital gain, while other investors buy stock and hold it to take advantage of dividend payments. Companies such as Microsoft and Apple are known to provide high dividend payments historically.
If the stock performs well over time, it can be an incredibly lucrative and stable source of income for the investor. In some instances, the investor is given the option to purchase additional shares in the stock instead of receiving a dividend payment.
3. A high return on investment
As with all investments, the main reasons for holding on to any financial asset is for the return on investment (ROI). Stocks, in particular, have been known to provide investors with a high ROI when they are performing well in the market. This is in contrast to securities such as government bonds, which are safe investments but only produce about half the return that stocks do.
As mentioned earlier, holding on to a stock for an extended period of time will let the investor ride out periods of low performance and eventually earn a high return on investment.
4. Lower taxes
Many people invest their money in stock and other financial assets because the amount of taxes paid on the investments in the long term is much lower than the tax paid on the income. Any profits or capital gains earned on the stocks are subject to taxes, but they can be capped after holding the stock for a period of longer than one year. However, if you sell the stock within a year, the level of tax imposed on the sale is equal to the income tax.
Costs of Holding Stock
1. Capital costs
When an owner purchase inventory for their business, a lot of liquid cash is tied up in the inventory, which cannot be recouped until the inventory is sold. The cost of holding the inventory is the capital cost, and it includes both the financing costs (money spent) and the opportunity cost, which is what could’ve been done with the money had the inventory not been purchased.
2. Storage space
In addition to the cost of purchasing inventory, the owner also needs a place to store the goods until customers purchase them. Storage costs can include a variety of things – from the electricity required to the manpower (wages for the workers) needed to transport the goods from the warehouse to the store as required. Alternatively, when the stock runs out, the company could incur additional expenses as a result of the shortage.
3. Risk of becoming obsolete
There is a risk that the inventory held by the business can become obsolete or outdated. This can arise from changes in consumer tastes, new developments in technology, or a competitor producing the same good at a lower price.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:
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