Open Position

Updated on March 27, 2024
Article byPrakhar Gajendrakar
Edited byPrakhar Gajendrakar
Reviewed byDheeraj Vaidya, CFA, FRM

Open Position Meaning

An open position refers to one of the important stock trading terms implying an initiated trade or position which is not yet finished with an offsetting trade or position. The strategy followed by the investors influences its creation and closing.

The common method of entering into such a phase is buying (long position) when anticipating a bullish trend and selling short (short position) during a bearish trend. The open status is followed by exiting or closing decisions instantly or in the future. For example, a position is closed if the predefined profit is attained.

Key Takeaways

  • An open position definition points to an initiated trade or position which is not yet finished with an offsetting trade or position.
  • When an investor buys or shorts security, a position is opened. The two common types of positions are long (to buy) and short (to sell) positions.
  • Long-term investors take long positions on stocks irrespective of the market conditions. In contrast, intraday traders prefer to close all positions by the end of the trading day.
  • The forex trader buys, or short sells a currency pair, creating a position. When he sells or buys back the currency pair, the position closes.

Open Position Explained

An open position points to the amount of stock or other financial instrumentsFinancial InstrumentsFinancial instruments are certain contracts or documents that act as financial assets such as debentures and bonds, receivables, cash deposits, bank balances, swaps, cap, futures, shares, bills of exchange, forwards, FRA or forward rate agreement, etc. to one organization and as a liability to another organization and are solely taken into use for trading purposes.read more that an individual or an entity owns or borrows for selling short. The number of open positions varies with investors, specifically the strategies followed by them. For example, the duration of open statuses will be long for the traders employing long-term strategies like trend trading, and it will be short for traders investing in short-term strategies like day trading. In trend tradingTrend TradingTrend trading refers to a distinct trading strategy that identifies and utilizes market momentum to earn profit. Its application is found in various markets, including stocks, bonds, currencies, metals, and commodities. To assess market momentum, investors employ a variety of technical indicators.read more, the positions are closed before the trend ends, and in the case of day tradingDay TradingDay Trading refers to buying & selling securities/financial instruments within the same trading day to earn profit through margin loans. Day traders are also called speculators as they do a lot of guesswork in terms of securities. read more, the positions are closed before the market closes on the trading day.

Open Position

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Another terminology similar to it is the open interestOpen InterestOpen interest refers to the total outstanding or open contracts in a derivative market at any time. The quantitative value shows the total number of contracts that have yet to be liquidated in the market. It is frequently observed in conjunction with data from the futures and options markets.read more in the futures marketFutures MarketA futures market is a financial marketplace where participants trade futures contracts for commodities, stock indices, currency pairs, and interest rates at a pre-determined rate and agreed-upon future date. It, thus, protects investors and traders from losing money on a transaction even if the price of the commodity or financial instrument rises or falls later.read more. Open interest is the number of open or outstanding derivative contracts that have not yet expired, closed, exercised, or physically delivered. It reflects insight into the cash flowsCash FlowsCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more in and out of the futures and options market.

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Video Explanations of the Open Position

 

Open Position in Trading

A trader’s portfolio is a collection of open positions (long, short, or neutral) held by the trader. The trade is in an active state when the position is open. It stays open until an opposing trade is executed to close it, and the risk exists until the position is closed. Any market movements would directly influence the holdings or the position. As a result, active positions are risky for investors since there is a possibility of loss.

Investors may determine if shorts are expanding or lowering on a stock by looking at the dollar amount of a company’s short positionShort PositionA short position is a practice where the investors sell stocks that they don't own at the time of selling; the investors do so by borrowing the shares from some other investors to promise that the former will return the stocks to the latter on a later date.read more, particularly the daily movement. Tesla stock has the greatest short position in 2018, according to the Top 10 shorted stocks by dollar amount list. It is projected that Tesla’s stock has the largest short interest of more than $10 billion. It’s hardly a surprise that the largest market capitalization stocks with high valuations are among the most heavily shorted. Apple had the second-largest short position at $9.4 billion, AT&T had the third-largest at $7 billion, Alphabet/Google had the fourth largest at $6.9 billion, and Amazon, Netflix, and Facebook continue the list.

Open Position in Forex

When a forex trader buys or short sellsShort SellsShort Selling is a trading strategy designed to make quick gains by speculating on the falling prices of financial security. It is done by borrowing the security from a broker and selling it in the market and thereafter repurchasing the security once the prices have fallen.read more a currency pair, the trader creates a position, and when he sells or buys back the currency pairCurrency PairA currency pair is a combination of two different national currencies valued against one another. Its purpose is to compare the value of one particular nation’s currency to another.read more, the closing of the corresponding position occurs. For example, if a trader anticipates that the value of a base currency in a currency pair will rise, a trader will open a buy or long positionLong PositionLong position denotes buying of a stock, currency or commodity in the hope that the future price will get higher from the present price. The security can be bought in the cash market or in the derivative market. The course of action suggests that the investor or the trader is expecting an upward movement of the stock from is prevailing levels.read more. Whereas, If the trader believes that the base currency will fall, he will sell or opt for opening a short position.

Another important concept is the open position ratio. It is calculated as the ratio of open interest held for a specific currency pair on a given trading platform or exchange to the total number of positions held for all the major pairs on that platform. It indicates the currency pair with the most open interest on a platform or exchange and the market sentiment.

Frequently Asked Questions (FAQs)

What is an open position in finance or financial markets?

The term is used in the financial markets to indicate the trade initiated and not yet closed by conducting a contrasting trade. For example, if an investor purchases engaged in active trading, purchasing ten shares of a certain stock is said to have initiated the trade, and it is open but not yet closed. The investor sold the ten shares on the same day to gain from short-term price movements, the trade is completed, and positions are closed.

What is an open position in the futures market?

It is also known as open interest in the futures and options market. Open interest is the number of open or outstanding derivative contracts that have not yet expired, closed, exercised, or physically delivered. It reflects insight into the cash flows in and out of the futures and options market.

What are positions in trading?

In trading, a position refers to the number of financial assets purchased or sold short by an investor. They usually buy when an uptrend is anticipated and sell short when they expect a downtrend. The position can be long, short, or neutral.

This has been a Guide to What is Open Position & its definition. We explain its meaning as a stock trading term, long and short positions. You can learn more about trading from the articles below –

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