A close position in trading means that a previous position has been changed and trading has come to an end. A close position is an opposite of an open position in which the investor closes the transaction after making a profit or incurring a loss.
There are two situations in which the investor or trader takes the open and close position in trading:
Long Position: In a long position, the investors are wishing for the prices of the stock to go up. So, they take an open position by buying a security such as shares when the price is low. As the price goes up (or goes down resulting in a loss), they sell the shares taking a close position.
Short Position: In a short position, the investors expect the price of security such as shares to fall in the future. So, they buy shares at the current price and sell them to someone at a higher price. By quickly selling the shares, investors take an open position. When the price falls, they buy back the number of shares they had previously sold.
So, traders can take a close position while ending trade when they sell or buy securities.
Why Investors Close a Position?
The most common reasons an investor closes a position to exit trading is because:
- They have generated cash (profit) from trading
- They have incurred losses and have reached stops levels
- They need to take a close position to satisfy the profit margins
Some investors might close a position in a few minutes or hours after opening while others can wait months or even years to close.
Some types of securities expire after a certain time therefore they cannot be traded for longer periods. Once the security expires, it cannot be closed because investors cannot sell it or buy it.
Generally, investors control when a closing position is taken but in certain cases, the brokers have the pre-consent of investors to close a position. For instance, if the shares decline rapidly or there are other market anomalies, the broker may not have enough time to notify the investor. In such situations closing a position can help investors minimize losses.
Understanding Close Positions
In a financial market, securities are traded heavily as investors are opening and close positions during the trading day. The open position is the initial position of investors when they buy or sell securities taking the long or short position.
When investors have reached their goal, they exit the market by taking a close position. When investors incur losses and don’t want to incur loss beyond a certain point, they close a position to avoid further loss.
Let’s understand this through an example of a close position in long trade:
Let’s say that you are an investor who anticipates the price of ABC shares to go up. ABC shares are selling at $100 right now. So, you buy shares at $100, and take an open position.
Now, suppose the price goes up to $200 a share, and you know that it is the highest price ABC shares can reach and, in the future, the stocks will plummet for whichever reason. So, you sell the shares at $200 and take a close position. You take a close position because you profited from trade and were not interested in further trading because of your future market expectations.