What is an Exit Point
An exit point is the price at which an investor sells an investment. The exit point can be decided and integrated at the time of an initial investment or it may become part of the investment strategy over time.
BREAKING DOWN Exit Point
An exit point can be a consideration in a variety of different types of investments. Active investors can use various types of conditional orders to integrate exit points and an exit strategy into their securities investments. Investors in private companies will also typically have an exit strategy plan when investing large amounts of capital.
Active Trading Strategies
In securities trading, exit points can be used to manage the risk of loss and also to set profit targets. Investors commonly use conditional orders to set exit points on securities that have uncertain risks. Investors may also apply an exit point to a traded investment when developments are occurring that affect the price either positively or negatively.
One of the best examples of a trading strategy that integrates premeditated exit points at the time of initial investment is a bracketed buy order. A bracketed buy order is a conditional order that includes an exit point with a profit target and an exit point with a stop loss target. In a bracketed buy order an investor buys a security then sets a profit limit order at a specified price and a stop loss order at a specified price. The investor can vary the price of their stop loss order and profit limit order according to their risk tolerance. A bracketed buy order is a good way to manage risk on a security at the time of initial investment. It can be especially helpful if the investor is uncertain about the overall profitability of the security or if they wish to only hold the security over a short time period.
Once an investor owns a security they can also easily place conditional exit point orders at any time. Profit limit orders will help an investor to exit with a planned profit while stop loss orders will help an investor to set a specified value for losses. An investor following developments on their securities may see that a company has just announced news that is expected to significantly increase its value in the near-term. Given this news they may wish to set a profit limit order to take gains from this potential upswing in the price. Adversely, negative developments on a company might also be released that could cause losses to the stock price. To protect against this risk the investor could also add a conditional stop loss order to exit if the stock reaches a specified price.
There are many different strategies that can be used with integrated exit points. Most involve conditional orders which can be set as good until canceled to provide for a long-term exit strategy. Investors should also keep in mind that any exit from an investment involving capital gains will be taxed at either a short-term or long-term capital gains tax rate.
Business Exit Strategies
Businesses making large capital investments in private companies will also seek to manage exit points and exit strategies across their investments. Generally, an exit point and exit strategy is a part of all long-term business investment plans. For some investors the exit point may be an initial public offering. In other cases, an investor will set a profit target and maximum loss as part of their overall investing strategy.