What Is a Close Position?
Closing a position refers to executing a security transaction that is the exact opposite of an open position, thereby nullifying it and eliminating the initial exposure. Closing a long position in a security would entail selling it, while closing a short position in a security would involve buying it back. Taking offsetting positions in swaps is also very common to eliminate exposure prior to maturity.
Closing a position is also known as "position squaring."
Key Takeaways
- Closing a position refers to canceling out an existing position in the market by taking the opposite position.
- In a short sale, this would mean buying back the security, while a long position entails selling the security.
- A closing transaction is generally initiated by a trader but, in some instances, it may also be forced closed by brokerage firms if certain conditions are met.
Understanding Close Positions
When trades and investors transact in the market, they are opening and closing positions. The initial position that an investor takes on a security is an open position, and this could be either taking a long position or short position on the asset. In order to get out of the position, it needs to be closed. A long will sell to close; a short will buy to close.
Closing a position thus involves the opposite action that opened the position in the first place. An investor who purchased Microsoft (MSFT) shares, for example, holds those securities in his account. When he sells the shares, he closes the long position on MSFT.
The difference between the price at which the position in a security was openedand the price at which it was closed represents the gross profit or loss on that security position. Positions can be closed for any number of reasons—to take profits or stem losses, reduce exposure, generate cash, etc. An investor whowants to offset his capital gains tax liability, for example, will closehis position on a losing security in order to realize or harvest a loss.
The time period between the opening and closing of a position in a security indicates the holding period for the security. This holding period may vary widely, depending on the investor's preference and the type of security. For example, day traders generally close out trading positions on the same day that they were opened, while a long-term investor may close out a long position in a blue-chip stock many years after the position was first opened.
It may not be necessary for the investor to initiate closing positions for securities that have finite maturity or expiry dates, such as bonds and options. In such cases, the closing position is automatically generated upon maturity of the bond or expiry of the option.
Special Considerations
While most closing positions are undertaken at the discretion of investors, positions are sometimes closed involuntarily or by force. For example, a long position in a stock held in a margin account may be closed out by a brokerage firm if the stock declines steeply, and the investor is unable to put in the additional margin required. Likewise, a short position may be subject to a buy-inin the event of a short squeeze.
A close position might be partial or full. If the security is illiquid, the investor may not be able to close all his positions at once at the limit price specified. Also, an investor may purposely close only a portion of his position. For example, a crypto trader that has an open position on three XBT (token for Bitcoin), may close his position on only one token. To do this, he will enter a sell order for oneXBT, leaving him with two open positions on the cryptocurrency.
Example of a Closed Position
Suppose an investor has taken a long position on stock ABC and is expecting its price to increase 1.5 times from the date of his investment. The investor will close out his investment, after the price reaches the desired level, by selling the stock.
FAQs
Closing a position refers to executing a security transaction that is the exact opposite of an open position, thereby nullifying it and eliminating the initial exposure. Closing a long position in a security would entail selling it, while closing a short position in a security would involve buying it back.
What is an example of a closed position? ›
A closed position is a trade that is no longer active and has been closed by a trader. To close a position, you need to trade in the opposite direction to when you opened it. For instance, if you take a long position on a stock, you will have to sell an equal amount of stock to close your position.
What does close mean in trading? ›
What Is the Close? The close is a reference to the end of a trading session in the financial markets when the markets close for the day. The close can also refer to the process of exiting a trade or the final procedure in a financial transaction in which contract documents are signed and recorded.
What is an example of buy to close? ›
Example of Buy to Close
The trader believed the underlying stock price would remain flat or rise, so they put on a neutral to bullish strategy by selling one options contract. A trader might also sell options when they believe implied volatility will drop.
When should you close a trading position? ›
Traders will generally close positions for three main reasons:
- Profit targets have been reached and the trade is exited at a profit.
- Stops levels have been reached and the trade is exited at a loss.
- Trade needs to be exited to satisfy margin requirements.
Closing a position refers to executing a security transaction that is the exact opposite of an open position, thereby nullifying it and eliminating the initial exposure. Closing a long position in a security would entail selling it, while closing a short position in a security would involve buying it back.
Which is the best example of a closed system? ›
Thus, an air-tight container is an example of a closed system. Hence, the correct answer is option B i.e an air-tight container.
Is close the same as sell? ›
The sale is the decision that someone wants something. The close is when someone feels confident and good in their success enough to be able to comfortably separate from their money for something that they've already made the conscious empowered decision that they want.
What is the difference between sell and close position? ›
Key Differences Between Sell and Close
1. Direction of the Trade: Selling involves opening a short position, while closing involves reversing an existing position. 2. Timing of the Trade: Selling can occur at any time, while closing occurs only when a trade is open.
Who can trade after close? ›
Who Can Trade After Hours? Individual retail investors and institutional investors alike can trade after hours, as long as their brokerage offers it. There aren't any restrictions on who can trade after hours, although retail investors generally weren't able to trade after hours until mid-1999.
Buy To Close Explained
Buy to Close option refers to paying for someone else to occupy one's place till the expiration of the options contract. In other words, day traders remove themselves from the current options contract and close their position at risk. They can also buy to close a put option.
What is sell open vs sell close? ›
A sell-to-open order is an options order type in which you sell (also described as write) a new options contract. In contrast, a sell-to-close order is an options order type in which you sell an options contract you already own. Both types of options, calls and puts, are subject to these order types.
What is buying open vs close? ›
Buying to open is when you purchase a new options contract and assume either a long or short position. Conversely, buying to close is when you purchase an existing options contract that matches a contract you sold. In doing so you offset your existing contract and exit your position.
Does closing a position count as a day trade? ›
A “round trip” simply means opening and closing a security position. Whether you buy or sell to open, when you close the position, you've completed a round trip. If you did it within a single trading day, you've made a day trade.
How long can you hold a trading position? ›
In the forex market, a trader can hold a position for as long as a few minutes to a few years. Depending on the goal, a trader can take a position based on the fundamental economic trends in one country versus another.
How long do traders hold positions? ›
Position trading is a long-term strategy that allows you to hold a Forex position for a long period, usually a few months to years. This strategy enables you to ignore short-term price fluctuations and rely on broader and fundamental long-term trends.
What does closed position mean job? ›
There are a number of things a closed posting may mean: The position has been filled or removed. There is already a selection of candidates moving forward in the application process. Your application didn't meet the requirements for the position.
What are 2 examples of a closed system? ›
Within thermodynamics, closed systems do not allow matter to enter or leave them because energy such as heat can always be transferred across boundaries. A thermos is a closed system, but not completely or truly closed to the world around it. Another example is an artificial or engineered system such as a thermos.
What is an example of a closed system company? ›
Some companies are closed systems because they have little interaction with their outside environments or elements. Such systems “does not mean the organizations are completely closed” (McLean, 2012, p. 47). A good example of a closed organization is the National Aeronautics and Space Administration (NASA).
How do you say a position has been closed? ›
After careful consideration we have decided to not fill this position. We appreciate your interest in this position and wish you continuing success in your career.
