Basis means various things when it comes to the field of finance. However, the term most often refers to the difference between the price and expenses that occur during transactions when calculating Taxes. This also relates to terms like ‘cost basis’ or ‘tax basis’. It is more commonly used when it comes to Capital gains and losses, while calculating income tax filings.
However, it is important to note that basis can also refer to the difference between the spot price of a commodity that can be delivered and the relative price of the futures contract. The term basis can also be used when it comes to security transactions.
A security basis the price that is involved in the purchase after paying the commission and other expenses. This is also called a cost basis or tax basis. The end figure is used to calculate Capital Gains or losses when the security is sold.
For example, company XYZ purchases 2000 shares for Rs. 5 per share. Therefore, the cost basis will be equal to the total purchase price which is Rs. 10,000.
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In the futures market, the basis shows the difference between the price of a product and the futures price of the product. This is an important thing to keep up with when it comes to portfolio managers and traders. The basis is necessarily accurate all the time since there will be gaps between spot and relative price until the expiry of the nearest contract. Other variations could include the difference in product quality, locations of delivery, etc.
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