Open Positions: Meaning, Risks, And Management

An open position in investing is any established or entered trade that has yet to close with an opposing trade. An open position can exist following a buy, a long position, a sell, or a short position. In any case, the position remains open until an opposing trade takes place.

For example, an investor who owns 500 shares of a certain stock is said to have an open position in that stock. When the investor sells those 500 shares, the position closes. Buy-and-hold investors typically have one or more open positions at any given time. Short-term traders may execute “round-trip” trades; a position opens and closes within a relatively short period. Day traders and scalpers may even open and close a position within a few seconds, trying to catch minimal but multiple price movements throughout the day.

An open position represents market exposure for the investor. The risk exists until the position closes. Open positions can be held from minutes to years depending on the style and objective of the investor or trader. The only way to eliminate exposure is to close out the open positions. Notably, closing a short position requires buying back the shares while closing long positions entails selling the long position.

The recommendation for investors is to limit risk by only holding open positions that equate to 2% or less of their total portfolio value. By spreading out the open positions throughout various market sectors and asset classes, an investor can also reduce risk through diversification. For example, holding a 2% portfolio position in stocks spread out through multiple sectors—such as financials, information technology, health care, utilities, and consumer staples along with fixed-income assets such as government bonds—represents a diversified portfolio. Investors adjust the allocation per sector according to market conditions, but keeping the positions to just 2% per stock can even out the risk. Using stop-losses to close out positions is also recommended to curtail losses and eliminate exposure of underperforming companies. Investors are always susceptible to systemic risk when holding open positions overnight.

Day traders buy and sell securities within one trading day. The practice is common in the forex and stock markets. However, day trading is risky and not for the novice trader. A day trader attempts to close all their open positions before the end of the day. If they don’t, they hold on to their risky position overnight or longer during which time the market could turn against them. Day traders are typically disciplined experts; they have a plan and stick to it. Moreover, day traders often have plenty of money to gamble on day trading. The smaller the price movements, the more money is required to capitalize on those movements.

Open positions in investing play a crucial role in the world of trading and investment. They represent active trades that expose investors to market risk until they are closed with opposing trades. While they offer opportunities for profit and flexibility, they also come with risks, especially in volatile markets. Managing open positions through diversification, limiting position sizes, and using stop-loss orders can help investors effectively control their risk. Day trading with open positions is a high-stress endeavor that requires discipline and substantial capital. Understanding the significance and management of open positions is essential for any investor or trader.

Open positions represent active trades that have not yet been closed. They expose investors to market risk until they are closed with opposing trades.

Investors can diversify their open positions, limit the size of positions, and use stop-loss orders to manage risks effectively.

Day trading is risky and not recommended for novice traders. It requires discipline, expertise, and a substantial amount of capital.

Day traders aim to open and close positions within a single trading day. Open positions play a central role in this short-term trading strategy.

Investors can profit from open positions when the market moves in their favor. Buy-and-hold investors may benefit from long-term gains.