Basis (Investing)

Definition

The term basis refers to the total cost of a security, including commissions, expenses, and fees.  Basis can also refer to the difference between the spot price of a commodity and its futures price, as well as the after-tax balance of an IRA.

Explanation

In finance, the term basis has several meanings.  It can refer to the total price paid by an investor for security, which includes sales commissions, fees, and expenses.  In this context, the term is synonymous with "cost basis."

Basis can also refer to the after-tax balance of an IRA.  In this context, basis would be calculated as all of the non-tax deductible contributions placed into the account, plus the after tax balance of tax deductible contributions, plus the after tax balance of all earnings in the account.

Finally, basis can refer to the difference between the spot (cash) price of a commodity and the price of the nearest contract in terms of expiry.  In this context, an investor might examine the basis of a commodity to understand if there is an opportunity for arbitrage.

Related Terms

basis point, basis trading