What it means
Whenever you buy something you intend to sell later, or sell something you intend to buy back, you hold an open position. A trader who buys 500 shares and keeps them has an open long position, and one who sells shares borrowed from a broker has an open short position.
The position closes only when an equal and opposite trade is made. Open positions matter because they carry market risk.
The value changes every time the price moves, and the holder bears the gain or loss until the position is closed. Companies face the same issue when they hold foreign currency balances, commodity stocks or unhedged contracts.
Finance teams monitor open positions closely. Treasury departments report net open currency positions, trading desks track exposure by asset, and risk managers set limits so no single position can cause damaging losses.
Brokers also require margin, which is cash held as security, against positions that could lose money. There is an accounting side too.
Many open positions are measured at fair value at each reporting date, with the unrealised gain or loss going to the income statement or equity depending on the rules that apply. The profit becomes realised only when the position is closed.
The size of the position and the use of borrowed money change the picture. A leveraged position, where the holder has borrowed to buy more than the cash on hand would allow, magnifies both gains and losses, so a small price move can wipe out a large part of the holder's own money.
An open position is not necessarily a mistake. Many positions are left open on purpose, either because the holder expects the price to move favourably or because the position hedges another exposure.
The danger lies in positions left open without anyone actively monitoring them.
In practice
Real-world examples.
Example
A small exporter invoices a customer in a foreign currency payable in 90 days. Until the money arrives and is converted, the company has an open currency position and will gain or lose as the exchange rate moves.
Example
A commodity trader buys 100 contracts of a futures product and holds them overnight. The broker marks the position to market each day and adjusts the margin account for the gain or loss. If the account falls too low, the broker issues a margin call asking for more cash.
Example
An investor sells shares short because she expects the price to fall. Her position stays open, with potentially unlimited loss, until she buys the shares back and returns them to the lender.
Formula
Calculation
Unrealised profit or loss on a long position = (current price - entry price) x quantity
Unrealised profit or loss on a short position = (entry price - current price) x quantity
An investor buys 500 shares at $40 per share, so the entry cost = 500 x 40 = $20,000. The price rises to $46, so the unrealised gain = (46 - 40) x 500 = $3,000. If the price had instead fallen to $37, the unrealised result = (37 - 40) x 500 = -$1,500, a loss that becomes real only if she sells. Until then the position remains open, and the holder can choose to close it, hold it or add to it.Case study
Seen in the real world.
Tidewater Beverages is a fictional drinks manufacturer that buys ingredients priced in a foreign currency. Its treasurer noticed that unpaid supplier invoices were building up, leaving an open position of $2,400,000 in that currency.
When the currency strengthened by 5%, the cost of settling those invoices rose by 2,400,000 x 0.05 = $120,000. The loss was unexpected because nobody had been tracking the exposure in one place.
The company then began reporting open currency positions weekly and hedged most of the balance with forward contracts. The illustrative lesson is that an unmonitored open position is a risk, however ordinary it looks on the ledger. The treasurer also set a limit so that any open position above $500,000 in a single currency needed written approval, which gave the board a simple control.
Watch out
Common mistakes.
- Treating an unrealised gain as profit already earned, when it can disappear if the price reverses before the position is closed.
- Forgetting that businesses have open positions too, through foreign currency balances, commodity purchases and unhedged contracts.
- Leaving positions open without limits or monitoring, which allows small exposures to grow into large losses.
Questions
People also ask.
Is a long position the same as an open position?
A long position is one kind of open position, held after buying an asset, and a short position after selling one is the other kind.
How do I close an open position?
By making the opposite trade for the same quantity, such as selling shares you hold or buying back shares you sold short.
Do open positions have to be reported in the accounts?
Often yes, because many are measured at fair value at the reporting date, but the treatment depends on the type of instrument and the accounting standards applied.
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