The term cost of carry denotes the combined cost of holding an investment position. Possible costs of carrying and investment include fees for secure storage, insurance, custodial fees (in the case of securities), overnight fees (in the case of contracts for difference and forex) and maintenance (in the case of real estate).
The cost of carry varies greatly between different kinds of investment vehicles. Understanding an investment’s cost of carry is important because this must be subtracted when estimating or calculating capital gains.
Example of cost of carry:
You want to buy 20,000 Swiss francs worth of shares in a company’s stock. Because you are unable to obtain a physical stock certificate, you must open a custody account at a custodian bank. The bank charges annual custodial fees equal to 0.4% of the value of your shares. If you hold your shares for one year and they do not gain or lose value, you will pay an 80-franc custodial fee. If you keep them a second year during which their value is 25,000 francs, you will pay a 100-franc custodial fee for that year. The cost of carry over that 2-year investment term would be 180 francs. You would have to deduct the 180-franc cost of carry from the 5000-franc gain to determine the true capital Gain on the investment.
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