Selling and closing a position? How are the two terms different? Although many modern sales traders believe that the two coexist, there lies a difference. Let us be guided by the following example.
A client calls a salesperson for a trade deal, and then when the sales representative returns, the boss asks how the sale went. The salesperson might give a positive reaction or response from the client. However, if no deal is closed, then that is where the difference begins. The purpose of any trade sale is closing a position or closing a trade deal when the client buys.
Even though the salesperson did a marvelous job, they left the most crucial part of closing a position. We dare repeat, selling differs completely from closing a position.
What is the difference between selling and closing a position?
Selling a position simply means the presentation, promotion, marketing, and creating value for whatever is being sold.
Closing a position is by far different from selling. In our earlier illustration, even though the salesperson did a wonderful job of selling, it did not result in closing a deal or completing a transaction. Not closing a transaction can lead to losing the sale, especially if another salesperson from a competing firm finds the client before you. In summation, despite the salesperson reaching out, by not closing the deal, they haven’t completed the job.
After that brief introduction, let us delve straight into our main content.
Table of contents
- Closing a Trade
- Selling an Asset
- Buying an Asset
As we have said, the value of the firm lies at the close of the transaction. Telling the clients about the services or products is not good enough. Let us switch to our main sub-topics.
Closing a Trade
In simple terms, closing a trade means ending an existing investment. For example, if you own shares worth $500 of Coca-Cola and you decide to close your trade or position, you will receive back your initial capital, i.e. $500, and end your investment in Coca-Cola. After the close, you cease to own shares at the firm. However, it is important to note that it is not limited to shares alone but to all financial assets.
Important Aspects to understand on closing a trade
After you establish your asset position, you understand you must decide on when to close that trade or position. To do this, you will to reverse your existing contract. For example, for an open contract as of March 2022 of $600 to be closed, you must place a selling order of the same contract and amount. Why should you close a trade?
- Once you reach a profit target, you can decide to exit the trade at a profit
- If you reach a stop level and you exit a trade at a loss
- Exiting a trade to meet the margin requirements
Now let us elaborate more on the above scenarios.
You can place an exit order that is automatically triggered once prices get to a predetermined target. To achieve this, you put a limit order.
The exit strategy one determines the outcome of closing a trade. The predetermined closing order enables you some time off your computer as the order is fulfilled. However, it could limit the full outcome of the close especially, where the move was not over. In summation, if you could wait and place your closing order when the target price is reached, you might somehow time the move end and maximise profits. However, a long hold on a position has its own risks.
To avoid excessive losses, you need to protect your trading position by exiting on a losing position. Here, you set a stop in advance so that your trade is closed at a certain price. As is with above, you do not need to stick to your computer all the time.
Margin calls can also force you to close your trade whatever the market price is. If you are dealing with brokers, they will notify you or free up your account margin automatically. If you close a futures trade for profits, there is an increase in your account balance. Alternatively, if your account closes at a loss, the same is withdrawn from your account, decreasing your account balance. Remember, you will receive statements daily for all transactions in your account.
When to close a trade
One of the difficult challenges that you can experience is when to close a profitable position. You should tame the emotional part of it, to avoid overreaction. The reason is simple, to avoid closing a trade when you are scared, holding for more profits out of greed, resulting in loss of almost everything. Let the logic guide you as far as decision-making is concerned.
Even if you make a huge profit in an open position, what you do next should not be based on the amount you received. The real question should be, would your trade continue to gain based on the market dynamics? This means, if you are in a high trending position, keep it until you get a plain signal to close or exit the trade. If the uptrend continues on the highs, it is essential to keep your position but with the caution of limiting your risks by using the trailing stop. However, remember to keep your trailing stop slightly below your previous day’s low and allow the position to run as the market exits the trade on your behalf.
Another aspect to consider is the powerful signal such as a huge bearish bar that should dictate when to exit a trade. Do not base taking out your profits on breakout signals because many of these signals turn out to be false. Therefore, it is important to take out the profits instead of relying on support or resistance levels.
Another key indicator is the price action that can show whether to stay in the trade or bow out. If your favorable trend flattens out, it is time to exit. However, a firm uptrend that is continuous, shows that you can stay in the market. It is important to understand that whatever the indicators are, you should always put in place some risk management strategies to cushion yourself.
Selling an Asset
Selling an asset otherwise known as shorting or short selling differs from our previous theme of closing a trade. In short, selling an asset refers to opening a trading position when you think that the stock or asset price will go down. That position is known as CFD (Contract For Difference). You are selling stocks you do not own. You sell borrowed securities where you expect the price to go down. After your sale, you will be required to have the same borrowed shares in the future.
Selling an asset or shorting is mostly associated with trading shares. However, it can also apply to other financial markets like forex trading, trading indices, and digital currencies.
How short selling works
As a trader, you borrow an underlying asset, and then sell it at once at the trending market price. Pay the lender’s fee. Once you close the trade, you then buy the asset again at its trending or new price and then return it to the lender. If there is a market fall, you stand to profit from the fall. However, a rise in price means that you can as well experience the loss.
The action has its limitations. Remember, you are trading with assets you do not own. Therefore, if nobody wants to loan you, you cannot trade. This situation is known as unborrowable stock. In that case, you can alternatively use derivative products like the spread bets and CFDs, since they do not require an underlying asset to exchange.
For example, with CFDs, you agree to exchange the variance in price between your opening and closing position. The spreading bets occur when you place your bet in the market price’s direction (this is if you think it would fall). It happens when your currency values are at certain points once you open the trading position. These positions determine your profit. Below is an applicable example.
If the current price of an asset is $50,000 and you expect that the price will go down, you can open a short-selling position by placing 20 of that asset. Five days later, the asset’s price goes down to $49,500, then you decide to close the position. It means you have made a profit. Let us calculate the actual profit.
It is very simple; we calculate it by getting the opening trade price minus the closing position price times the number of the asset traded as worked below,
($50,000- $49,500 = $500) times 20 asset units coming to $10,000 profit.
Why short sell?
It increases your trading opportunities. The core reasons for shorting are hedging and speculation. You can speculate on price movements where you can generate returns even when the underlying asset price drops. On hedging, you can protect the trading losses, especially in a long trading position. For example, placing a long position on the S&P 500, any downward move might hurt you. Therefore, to dilute the negative impact, open a short trading position.
Everything in the world has a dark side. Selling an asset or shorting has its own shortcomings. It exposes you to higher loss risks in case the price behaves contrary to your expectations. In the event the price of an asset goes up, your loss potential could be unimaginable. To be safe, do not ignore the risk management strategies.
Buying an Asset
Buying an asset refers to purchasing an asset or going long. It implies that you are opening a trading position, hoping that the asset price will rise in the end. You can establish a long position in various asset classes, such as mutual, stocks, currencies, derivatives, and others. It is mostly associated with options contracts. To generate a profit from an upward movement of price, it is important that you go long (call option). The call option will give you the opportunity to buy the asset at a price. If you expect the price to fall, you go long (put option) to may sell at the desired price. Below are some types of going too long or long positions.
Going long on bond or stock
This is a conventional form of investment, especially for capital market investors. In this market segment, you buy the asset and hold it, expecting the price to go up in the future. It should be understood that the investor here does not intend to sell the asset soon. There could be some market disruptions along the way and could be very disastrous. This is so where you intended to retire or do liquidation. Another trouble can arise where there seems to be a prolonged bearish trend in the market. Another setback with this investment option is that it consumes a huge chunk of your investment capital and can limit you to investing in other profitable opportunities.
Options contracts
Having a long position on contracts can be beneficial, especially where the underlying security price goes up. There are two types of investors in this segment. An investor who believes that the price will fall buys a put option contract, whereas an investor, who thinks that the price for the asset would go up, holds a call option contract. There could be a bearish or a bullish sentiment, depending on whether the contract is a call or put option.
Futures contracts
An institution can use a futures contract otherwise known as long hedging to safeguard against abrupt price fluctuations. By doing this, the firm can lock a buy or purchase price of a commodity that is required in the future. The difference between futures and options is that the investor must buy or sell the asset with futures. Going long has some benefits such as limiting losses and locking price, however, this does not protect you from short-term abrupt price movements or expirations before benefits are realised.
In summation, a selling position is an initial process of selling an asset. You place your asset on sale expecting that someone will buy the asset. However, closing a position happens when you close the deal of selling the asset. You end the selling position and exit the trade once you strike a favorable trade deal.
免责声明：本文并非投资意见或投资建议，而是一篇市场推广通讯
