what is a disposition 
a disposition is the act of selling or otherwise disposing of an asset or security the most common form of a disposition would be selling a stock investment on the open market such as a stock exchange other types of dispositions include donations to charities or trusts the sale of real estate either land or a building or any other financial asset still other forms of dispositions involve transfers and assignments the bottom line is that the investor has given up possession of an asset understanding a dispositiona disposition of shares is perhaps the most commonly used phrase regarding a disposition let s say an investor has been a long time shareholder of a particular company but lately the company may not be doing so well if they decide to exit the investment it would amount to a disposition of that investment a disposition of shares most likely they would sell their shares through a broker on a stock exchange ultimately they have decided to get rid of or dispose of that investment if the sale results in any sort of capital gain then the investor will have to pay capital gains tax on the profits of the sale if they meet the requirements set by the internal revenue service irs other types of dispositions include transfers and assignments where someone legally assigns or transfers particular assets to their family a charity or another type of organization mostly this is done for tax and accounting purposes where the transfer or assignment relieves the disposer of tax or other liabilities for example if an investor purchased stock for 5 000 and the investment grew to 15 000 the investor can avoid the capital gains tax on their profit by donating it to a charity the investor is then able to include the entire 15 000 as a tax deduction business dispositionbusinesses also dispose of assets and very often of entire business segments or units this is commonly known as divestiture and can be done through a spinoff split up or split off the securities and exchange commission sec has very specific guidelines on how these dispositions must be reported and handled if the disposition is not reported in the financial statements of a company then pro forma financial statements are required if the disposition meets the requirements of a significance test significance is determined by either an income test or an investment test an investment test measures the investment value in the unit being disposed of compared to total assets if the amount is more than 10 as of the most recent fiscal year end then it is considered significant 1 the income test measures if the equity in the income from continuing operations before taxes extraordinary items and cumulative effects of changes in accounting principles is 10 or more of such income of the most recent fiscal year end 1 in certain situations the threshold level can be increased to 20 the disposition effectbehavioral economics also has something to say about one s propensity to sell a winning vs losing position based on the concept of loss aversion the disposition effect is a term that describes investor behavior in which they have a tendency to sell winning investments too early before realizing all potential gains while holding on to losing investments for longer than they should hoping that the investments will turn around and generate a profit this effect was first introduced by hersh shefrin and meir statman in 1985 in their paper the disposition to sell winners too early and ride losers too long theory and evidence studies show that investors should do the exact opposite of what the disposition effect states they tend to do 