What Is an Exit Point?
An exit point is the price at which an investor or trader closes a position. An investor will typically sell to exit their trade, since they are buying assets for the long term. A trader may sell at an exit point, or buy to close the position if they were short.
The exit point may be determined in advance based on a trader's or investor's strategy. Or, the exit point may be determined based on real-time market conditions or life requirements such as liquidating some investments in order to pay a bill.
Understanding the Exit Point
An exit point is often planned out, and then an order is sent out to initiate the exit. The exit point could result in a profit or loss, depending on which way the price went after purchase.
One example of an exit strategy that integrates premeditated exit points at the time of the initial investment is a bracketed buy order. A bracketed buy order is a conditional order that includes both a profit target and a stop loss exit point.
In a bracketed buy order an investor buys a security then sets a profit target order at a specified price in order to lock in a gain. The stop loss is placed at a specified price in order to limit risk in case the price moves in the opposite direction the investor expects. If one of the orders is hit, the other is canceled because the position is now closed.
The investor can vary the price of their stop loss order and profit target order according to their risk tolerance and expectations for the investment.
Typically the further away the orders are from the entry point, the more longer-term the trade will be. If the stop loss and profit target are close to the entry point, then the trade will likely be closed quite quickly when one of the orders is hit.
Once an investor owns a security they can place conditional exit point orders at any time. Profit target orders will help an investor to exit with a planned profit while stop loss orders will help an investor to set a cap on losses.
The investor may also simply use a market order to exit their position at any time. Or they could utilize a trailing stop loss order in order to participate when the price is moving in their direction but gets them out when the price starts moving against them.
When considering an exit from an investment involving capital gains, the gains will be taxed at either a short-term or long-term capital gains tax rate.
- An exit point is the price at which an investor or trader closes a position.
- Different types of orders are used to close a position, including profit targets (limit orders), stop losses (stop orders), and/or market orders.
- Exit points are typically planned out in an attempt to control risk and lock in gains. Taxes may also be considered as part of an exit point.
- Exit strategies are required in private companies as well, and can be more tricky since the seller of the shares needs to find a buyer.
Types of Exit Point Orders
A profit target is typically a limit order. If the investor is long an asset, they would place a limit order above the current price. When the price reaches that level their order will be sitting there ready to be filled.
A stop loss order is typically a stop market order. If an investor is long, the stop loss goes below their entry price. The order is triggered only if the stop price is reached. When it is, a market order is sent out to sell the asset at the current market price.
Orders can have additional parameters attached to them, such as an expiry date, or good-until-canceled which means the order will remain active until canceled. An order can also be set to only be active during the regular trading session, or to also be active during the pre- and post-market sessions.
Business Exit Strategies
Investors or institutions 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 (IPO). In other cases, an investor will set a profit target and maximum loss as part of their overall investing strategy.
An exit from a non-publicly traded company can be more difficult as the investor needs to find someone else to buy their share(s) of the company.
Real World Example of an Exit Point in the Stock Market
Exit points apply to both long and short positions. Consider a trader who has entered a short position in a falling stock. This scenario could have occurred in Macy's Inc. (M). The stock broke below a rising trendline and entered into a downtrend. There was a brief rally, but as the price started to drop again a trader jumped into a short position at $36.40.
They placed a stop loss order (stop market order) at $39, just above the recent swing high in case the price went up instead of down.
Since they expect the price to drop, the trader placed a profit target (limit order) at $29.40, below the prior swing low.
This type of trade creates a favorable risk/reward scenario as the trader is risking $2.60 per share ($39 - $36.40) while expecting to make $7 per share ($36.40 - $29.40).