What it means
Traders and finance teams use the word constantly because it is more precise than saying you have invested in something. A position has a size, an entry price, a current value and a profit or loss, and all four are needed before anyone can judge whether it is sensible.
Positions are not limited to shares. A company can hold a currency position because it has invoices due in euros, a commodity position because it has contracted to buy copper, or an interest rate position because its debt is on a floating rate.
Position sizing is where most of the practical risk management happens. Whether a holding is 2% or 20% of a portfolio usually matters more to the eventual outcome than whether the underlying analysis was slightly right or slightly wrong.
The gain or loss on an open position is unrealised, meaning it exists on paper and changes every time the price moves. It becomes realised only when the position is closed by selling a long holding or buying back a short one, which is also when tax is usually triggered.
A related nuance is the net position. If one part of a business is long a currency and another part is short the same currency, the group's true exposure is the difference between them, which is why treasurers net exposures across the whole organisation before deciding what to hedge.
In practice
Real-world examples.
Example
A fund manager describes her fund as holding a 4% position in a regional grocery chain. On a $250,000,000 fund that is $10,000,000 at current prices, and the size is capped by the fund's rule that no single holding may exceed 5%.
Example
A UK-based components manufacturer invoices a US customer $3,000,000 payable in 90 days, which creates a long dollar position. If the dollar weakens before payment arrives, the sterling value falls, so the treasurer sells dollars forward to close the exposure.
Example
A hedge fund analyst takes a short position in an airline he believes is overvalued, borrowing and selling 80,000 shares. When the shares fall he buys them back at a lower price to close the position, and his profit is the difference less borrowing costs.
Formula
Calculation
Position value = number of units x current price per unit
Unrealised profit or loss = (current price - entry price) x number of units
An investor buys 5,000 shares in a listed distribution company at $42.00 each.
Position value at entry = 5,000 x $42.00 = $210,000
Six months later the share price is $47.50.
Position value now = 5,000 x $47.50 = $237,500
Unrealised profit = ($47.50 - $42.00) x 5,000 = $5.50 x 5,000 = $27,500
That is a gain of $27,500 / $210,000 = 13.1% on the money committed. Had the price instead fallen to $38.00, the position would be worth 5,000 x $38.00 = $190,000, an unrealised loss of $20,000, or 9.5% of the original $210,000. Nothing is realised in either case until the shares are actually sold.Case study
Seen in the real world.
Calderwood Instruments is a fictional scientific equipment maker used here as an illustrative case. It sold heavily into Japan and Switzerland, and each divisional finance manager hedged their own currency exposure independently as invoices were raised.
A group treasury review found the company was hedging far more than it needed to. The industrial division was long yen from export sales, while the newly acquired service division was short yen because it paid a Japanese subcontractor, and neither knew about the other. Across the group the net yen position was roughly a third of the gross figure being hedged, and the company was paying transaction costs on the whole gross amount.
Calderwood introduced a monthly group position report showing gross and net exposure by currency, and set a rule that only the net position above a $500,000 threshold would be hedged centrally. In this illustrative example, hedging costs fell by around 40% in the first year without any increase in the currency risk actually carried by the group.
Watch out
Common mistakes.
- Confusing an unrealised gain on an open position with money you actually have, and spending or budgeting against a number that can disappear next week.
- Focusing entirely on which asset to buy and giving almost no thought to position size, which is usually the bigger determinant of the outcome.
- Adding to a losing position simply to reduce the average entry price, without any fresh reason to believe the original analysis still holds.
Questions
People also ask.
What is the difference between a long and a short position?
A long position means you own the asset and gain when its price rises, while a short position means you have sold borrowed units and gain when the price falls.
Does closing a position always mean selling?
Not necessarily; you close a long position by selling, but you close a short position by buying the asset back, and derivative positions can be closed by taking an offsetting contract.
Can a business have a position without buying anything?
Yes, ordinary trading creates positions, because a foreign currency receivable, a floating rate loan or a fixed-price supply contract all create exposure to a price the business does not control.
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