What Is an Open Position?
Let me explain what an open position means in investing. It's any trade you've established or entered that hasn't been closed yet with an opposing trade. This can follow a buy, creating a long position, or a sell, creating a short position. In either case, your position stays open until you make that opposing trade.
Key Takeaways
- An open position is a trade you've established but not closed out with an opposing trade.
- If you own 300 shares of a stock, you have an open position in that stock until you sell it.
- An open position means market exposure for you, and the risk stays until you close the position.
- Day traders open and close positions in seconds and aim for no open positions at day's end.
Open Position Explained
Take this example: if you own 500 shares of a certain stock, you have an open position in that stock. When you sell those 500 shares, the position closes. As a buy-and-hold investor, you might have one or more open positions at any time. Short-term traders execute 'round-trip' trades, where a position opens and closes quickly. Day traders and scalpers might even open and close a position in seconds, aiming to catch small but frequent price movements throughout the day.
Open Positions and Risk
An open position exposes you to the market. The risk persists until you close it. You can hold open positions from minutes to years, depending on your style and goals as an investor or trader.
Your portfolio likely includes many open positions. The risk level depends on the position's size relative to your account and how long you hold it. Longer holding periods are generally riskier due to more exposure to unexpected events.
To eliminate exposure, you must close the open positions. Closing a short position means buying back the shares, while closing a long position means selling them.
Open Position Diversification
I recommend limiting risk by keeping open positions to 2% or less of your total portfolio value. Spread them across various market sectors and asset classes to reduce risk through diversification. For instance, holding a 2% position in stocks across sectors like financials, information technology, health care, utilities, and consumer staples, plus fixed-income assets like government bonds, creates a diversified portfolio.
Adjust allocations based on market conditions, but sticking to 2% per stock helps balance the risk. Use stop-losses to close positions and cut losses, eliminating exposure from underperforming companies. Remember, you're always vulnerable to systemic risk with overnight open positions.
Open Position and Day Trading
Day traders buy and sell securities within one trading day, common in forex and stock markets. It's risky and not for beginners. A day trader tries to close all open positions before the day ends. If not, they hold the risky position overnight or longer, when the market might move against them.
Day traders are disciplined experts with a plan they follow. They often have substantial capital for day trading. Smaller price movements require more money to profit from them.
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