A close position is a strategic move made by an investor to change position in a transaction. Investors do this when they feel that a position is unfavorable and they want to adjust their investment strategies to take advantage of or compensate for changes in the market. Depending on how an investor manages her or his accounts, triggers can be put in place to close positions automatically in response to key events, or positions may be closed manually as needed.
In the case of a long position, an investor is planning on holding an investment for an extended period of time to profit as the value increases. To close a long position, the investor would sell off the investment. This may be done if there is a concern that the value will drop or that the investment is unstable and could unbalance the investor's portfolio. Closing long positions must be timed carefully to get the best price on the investment at the sale.
Short positions involve holding investments for short periods of time for a rapid profit. When investors close short positions, they buy up or buy back the investment to turn it into a long position. Investors can choose to close position and go long if they see a potential for long-term profits. Holding onto investments has more potential risks because capital is tied up in the long position, but it can reap big rewards in terms of profits.
Essentially, a close position is done to get out of a transaction. The transaction is no longer working effectively for the investor and the investor opts to change strategies. Automatic close positions can be taken when values rise or fall past a certain level in order to rapidly move on changing market conditions. At other times, investors may make a decision to close a position on the basis of their observations and advice from a broker or financial advisor.
Managers of mutual funds and other pooled investment products are also responsible for taking a close position if they feel that it is in the best interests of the clients. Funds managers are required to act with the potential benefits to their clients in mind at all times. If a manager fails to adapt to changes in the market, there can be legal repercussions if clients determine that the manager knew about a risk and did not take steps to address it by taking a close position or making other strategic moves.
