What is a closed position?
The closing of a position refers to the execution of a securities transaction which is the exact opposite of an open position, thereby canceling it out and eliminating the initial exposure. Closing a long position on a security would result in its sale, while closing a short position on a security would involve its redemption. The taking of compensatory positions in swaps is also very common to eliminate exposure before maturity.
The closed position is also known as “position squaring”.
Understanding close positions
When transactions and investors trade in the market, they open and close positions. The initial position that an investor takes in a security is an open position, which can take a long or short position in the asset. To exit the position, it must be closed.
Closing a position takes the opposite action which opened the position in the first place. An investor who has bought Microsoft stocks (MSFT), for example, holds the 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 opened and the price at which it was closed represents the gross profit or loss on that position. Positions can be closed for a number of reasons – to take profits or stem losses, reduce exposure, generate cash, etc. An investor who wants to offset his capital gains tax, for example, will close his position on a losing security in order to realize or reap a loss.
The period between the opening and closing of a position in a security indicates the period of ownership of the security. This holding period can vary considerably, depending on the investor’s preference and the type of security. For example, day traders generally close trading positions on the same day that they open, while a long-term investor can close a long position in first-rate stock several years after the first opening of the position.
It may not be necessary for the investor to take closing positions for securities with maturities or finite maturities, such as bonds and options. In such cases, the closing position is automatically generated when the bond matures or when the option matures.
While most closing positions are taken 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 unwound by a brokerage firm if the stock drops sharply and the investor is unable to put in the required additional margin. Similarly, a short position can be the subject of a buy-in in the case of short squeeze.
A closed position can be partial or complete. If the security is illiquid, the investor may not be able to close all of their positions at once at the specified limit price. In addition, an investor can knowingly close only part of his position. For example, a crypto trader who has an open position on three XBTs (token for Bitcoin), can close his position on a single token. To do this, he will enter a sell order for an XBT, leaving him two open positions on the cryptocurrency.
Key points to remember
- The closing of a position refers to the closing of a transaction by taking the opposite position. In a short sale, this would mean buying stocks while a long position involves selling the stocks for a profit.
- A closed position is usually initiated by a trader but, in some cases, it can also be closed by brokerage companies if certain conditions are met.
Example of closed position
Suppose an investor has taken a long position in ABC stock and expects its price to increase 1.5 times from the date of its investment. The investor will close his investment, once the price has reached the desired level, by selling the security.