Close Position

What Is a Close Position?

Closing a position alludes to executing a security transaction that is the specific inverse of a [open position](/vacant position), in this way nullifying it and eliminating the initial exposure. Closing a long position in a security would involve selling it, while closing a short position in a security would involve buying it back. Taking offsetting positions in swaps is additionally exceptionally common to eliminate exposure prior to maturity.

Closing a position is otherwise called "position squaring."

Understanding Close Positions

At the point when trades and investors execute in the market, they are opening and closing positions. The initial position that an investor takes on a security is a vacant position, and this could be either taking a long position or short position on the asset. In order to escape the position, it should be closed. A long will sell to close; a short will buy to close.

Closing a position in this way involves the contrary action that opened the position in any case. An investor who purchased Microsoft (MSFT) shares, for instance, holds those securities in his account. At the point 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 addresses the gross profit or loss on that security position. Positions can be closed for quite a few reasons — to take profits or stem losses, reduce exposure, create cash, and so on. An investor who needs to offset his capital gains tax liability, for instance, will close his position on a losing security in order to understand or harvest a loss.

The time span between the opening and closing of a position in a security indicates the holding period for the security. This holding period might differ widely, depending on the investor's preference and the type of security. For instance, day traders generally close out trading positions around the same time that they were opened, while a long-term investor might close out a long position in a blue-chip stock numerous years after the position was first opened.

It may not be important for the investor to initiate closing positions for securities that have finite maturity or expiry dates, like bonds and options. In such cases, the closing position is consequently produced upon maturity of the bond or expiry of the option.

Special Considerations

While most closing positions are embraced at the prudence of investors, positions are sometimes closed involuntarily or forcibly. For instance, a long position in a stock held in a margin account might be closed out by a brokerage firm if the stock declines steeply, and the investor is unable to put in the extra margin required. Moreover, a short position might be subject to a buy-in in the event of a short squeeze.

A close position may be partial or full. Assuming the security is illiquid, the investor will most likely be unable to close the entirety of his positions immediately at the limit price indicated. Likewise, an investor may deliberately close just a portion of his position. For instance, a crypto trader that has a vacant position on three XBT (token for Bitcoin), may close his position on just a single token. To do this, he will enter a sell order for one XBT, leaving him with two open positions on the cryptocurrency.

Illustration of a Closed Position

Assume 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 arrives at the ideal level, by selling the stock.

Features

• A closing transaction is generally initiated by a trader at the same time, in certain instances, it might likewise be forced closed by brokerage firms in the event that certain conditions are met.
• Closing a position alludes to canceling out an existing position in the market by taking the contrary position.
• In a short sale, this would mean buying back the security, while a long position involves selling the security.