What Does Closed Position Mean in Stocks? | Is It All About Removing the Existing Risk?

November 22, 2021 | Editorial Team

“What does closed position mean in stocks?” is a question that many people ask themselves, and it can be quite daunting to understand. The answer to this question depends on the type of stock you are looking at: short and long sales. In general, when we speak about closed positions, we refer to open orders that you did not execute as a result of exerting the opposing position in the same contracts that you have in your account right now. This means you placed an order to purchase or sell shares, but you cancelled the order before the market opened.

What Does Closed Position Mean in Stocks?

Closing a position implies carrying out a security transaction that is contrary to an open position. By doing that, you invalidate it and remove the existing risk. You can close long position security by selling it. But with the short position security, you can close by purchasing it back. There are no other parties involved in a closed-market transaction as all trading is between the insider and the corporation.

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What Does Open and Closed Mean in Stocks?

In the financial world, open and closed positions are terms used to describe the market state where investors (see also robo advisors) are actively engaged in buying and selling securities. The open position is the initial position an investor takes on security. Investors can either take the long or short position.

If the investors establish a futures position, they can get out of the position by closing it. Investors can close the open position by taking the opposite position of the established futures position they hold in their accounts.

Long and Short Positions

There are two types of positions where investors can trade their assets in. They are long positions and short positions. An investor will sell to close in a long position and buy to close if it is a short position. There are two other types of short position and long position: the put and call.

Long Positions

The long position is what most investors associate with conventional investing strategy. Investors purchase securities (a call option) with the expectation that the asset will increase in price in the stock market. If the prices increase, the investors will profit in the long run. For this reason, the investors may turn to the best stocks in Canada, frequently called blue-chip stocks, to hold on to).

The suspected increase in the asset share price is attributable to a predicted increase in future asset value for growth investors (see penny stocks for solid growth prospects). On the other hand, for value investors, the expected increase in share price is attributable to the inherently inefficient market realizing the asset’s current value.

Long call position involves traders buying a call option. A long call option is beneficial only if the price of the asset goes up. The long put position is where traders buy a put option. With the put option, its value rises when the price of the asset goes down.

Short Position

The short position is a less popular investing strategy that involves the sale of a borrowed security. It is the exact opposite of the long position. Here investors bank on the increase in the price of an asset. With the short position, they invest with the expectations of a price decrease, which may not be the case with top stocks, like nickel stocks, for example, which are expected to grow.

Some growth investors might take a short security position, expecting the future growth rate to decline. But value investors take a short position whenever the asset is overpriced in relation to the underlying value. In both cases, there is an expectation that the price of the security might decline.

The short call position involves traders selling a call option. A short call option benefits only if the value of the call goes down. The short put position is where traders sell a put option. With the put option, investors will only benefit when the value of the put goes down.

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How Does the Short Position Work?

Short selling might seem challenging for some investors to understand. But it is an easy concept to grasp. Investors borrow securities from a brokerage firm, which they are obligated to return later at. The security price is expected to decrease in the future. The investors will sell the security on the open market. They will then purchase the security back once the share price falls under the initial price they sold it at. The investors will then return the security to the broker.

If the extent of the drop in the security price is large, the higher the profits investors will accrue. Investors usually take short positions due to their infinite risk because there is no upper limit to share prices. With long positions, losses are limited as share prices (see small-cap stocks) cannot drop lower than zero dollars.

Investors use stop-loss orders to mitigate the risks associated with short selling. In the long position, brokers use the instructions from stop-loss orders to sell stocks at a particular price to prevent losses and protect profits. It is even more important in the short position as they dictate the price to the broker to sell securities.

Closing Your Position

Closing your position means that you are bringing an end to your investment. When you cut yourself off the stock market movements, the new information will determine the direction of stock and trade (see also trading analysis methods explained). You need to make sure that you have enough money to cover all possible outcomes.

Ensure that you have enough cash to cover any potential losses. In this way, you won’t lose everything when the market moves against you.

Here are three main reasons investors will close positions:

  • The investors have met their profit targets and are closing the trade with a profit.
  • When the investors reach the stoping levels and are closing the trade at a loss.
  • Investors exit the trade to satisfy margin requirements.

Exiting a Rising Position

Here the investors use a limit order to exit positions. The investors place an existing order that will trigger an automatic exit only if the prices reach a fixed target. For instance, if the investor buys two E-mini S&P 500 futures at $ 2500. In this scenario, the trader will order to sell the ES futures for a profit of 500 dollars at 2,505. Suppose the price moves to that level. An order will be initiated to sell the ES futures.

Alternatively, the investor might consider watching the stock market move to make an order in real-time. When the price hits 2,505, the investor will exit the position and close the trade. Both cases involve the trader selling at a profit to close the long position, but there might be different outcomes according to the trader’s exit plan.

Exiting a Falling Position

Exiting a falling position is another way to minimize losses. An investor who takes a short position will close their position if the stock price goes below 2,500 (see also Canadian stocks to buy now). The trader will set a stop in advance to close the position at a particular price.

For instance, the investor will make an order at 2,495, equal to a loss of 500 dollars. When the price drops to 2,495, the investor will exit the position and close the trade. Investors can also exit the trade using limit order or market to monitor price in real-time before making an order to exit the position.

The benefit of investors placing an order in advance is that they do not have to wait over the computer for the order to fill. However, some traders who place orders in advance risk exiting the position before the move is over. If they monitor the move in real-time, they can close the position with a better profit margin. Investors will watch and time an exit based on the nature of price swings and market movements.

Margin Calls

Margin calls happen when the brokerage firm requires extra funds to cover its losses in case of a decline in the value of the shares. It is upon brokers to notify or liquidate their client’s positions and free up the firm’s account margin.

The trader’s account balance will increase if they close their futures position at a profit. However, if they close the futures position at a loss, their balance will decrease as they withdraw funds from their accounts. The firm will change the account margin once traders close their positions.

The brokerage firm will establish another margin for investors who want to place another futures order. Brokers will send statements to investors daily showing trades they placed or funds available in their accounts.

Stop-Loss Orders

Stop-loss orders allow traders to set limits for their trades. For example, if you are trading options, you can specify how much the option must rise or fall before you are allowed to exercise your right to buy or sell the underlying asset.

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The Bottom Line

There are many ways to invest in the stock market because each investor has their preferences and needs. However, there are specific strategies that are common among most investors. Some prefer to buy shares, while others would instead hold bonds. Some focus on the fundamentals of the company. Whatever method you choose, make sure that you understand what you are doing to avoid costly mistakes.