Posted in Finance, Accounting and Economics Terms, Total Reads: 322
Definition: Free Right of Exchange
A free right of exchange provides an investor the right to transfer the ownership of an asset to another without incurring any additional transactional charges/fee on the exchange. As there is no exchange of money, such transactions are exempt from any fees on an exchange. Therefore, such transactions differ from sales transactions in that the asset or security is given away or traded by investors without any involvement of money payments.
For example, the free right of exchange permits an investor owning a security to transfer a registered certificate to bearer form without incurring any transactional charges.
The free right of exchange plays a prominent role at the time of gifting a stock or while making stock donations. As the transaction under a free right of exchange is not taxable, it provides the benefit of avoiding any additional accruing capital gains tax on the asset while making a charitable donation.
Exchange funds allow investors to exchange large holdings of a single stock for a diversified set in a portfolio. The result is a swapping of stocks and as such, no transaction fees or sales costs are associated with such a trade. The investor can thus gain from the free right of exchange by balancing his or her portfolio in a way that avoids payment of capital gains tax.