DEFINITION of 'Lock In Profits'

Locking in profits refers to the realization of previously unrealized gains accrued in a security by selling all or a portion of the holdings. When an investor holds an open position, they may accrue unrealized or paper gains or losses that aren't realized until the position is closed. These gains are locked in when the investor sells their stake since they are no longer subject to change.

Also known as "realization" or "taking money off the table".

BREAKING DOWN 'Lock In Profits'

Traders and investors may lock in profits for many different reasons, but often times, it's to reduce risk. 

Long-term investors may lock in profits to maintain their portfolio balance. For example, an investor may have started with a portfolio divided equally among five funds. If one fund outperforms, its portfolio allocation might grow from 20 percent to 30 percent, which exposes the investor to added risk. The investor may lock in the profits for a portion of the outperforming fund and redistribute the proceeds among the other four funds to maintain an ideal portfolio allocation that minimizes risk and maximizes profits.

Short-term traders often lock in profits to generate income and reduce risk. For example, a trader may open a long position after a bullish earnings announcement with a series of price targets. After the stock reaches the first price target, the trader may lock in profits for one-third of the position and continue to hold the other two-thirds of the position until a higher price target is reached. This way, the trader is taking some money off the table and reducing their risk if the stock were to suddenly turn lower.

Traders set price targets to lock in profits using various forms of technical analysis, such as technical indicators or chart patterns, whereas long-term investors may lock in profits based on asset allocations or risk tolerance.

Example of Locking in Profits

Suppose that you purchase 100 shares of Acme Co. for $12 and the price went up to $36 two days later. All potential profits are unrealized because the position isn't partially or fully closed. If the stock moves lower, your profits will dwindle, and vice versa if it goes higher. You may decide to lock in the profits by selling 50 shares because 50 x $36 = $1,800. If the stock drops to $1, you will have still made a profit. In other words, locking in profits made it possible to "play with house money" in the investment.

RELATED TERMS
  1. Lock Limit

    A lock limit is a specified price movement determined by trading ...
  2. Mortgage Rate Lock

    A mortgage rate lock is an unchanging interest rate agreed upon ...
  3. Mortgage Rate Lock Deposit

    A mortgage rate lock deposit is a fee a lender charges a borrower ...
  4. Lock Period

    Lock period is the window of time over which a mortgage lender ...
  5. Locked Market

    A locked market is a market in which a stock's bid and ask prices ...
  6. Loan Lock

    Loan lock refers to a lender’s promise to offer a borrower a ...
Related Articles
  1. IPF - Mortgage

    Got a Good Mortgage Rate? Lock It In!

    Rising rates mean rising profits for lenders, providing incentive to increase rates whenever possible.
  2. Investing

    10 Ways to Profit From an Interest Rate Increase

    Discover 10 possible ways that individual investors and businesses can potentially profit from an environment of rising interest rates.
  3. Trading

    Average Rate of Return for Day Traders

    Is it possible to determine the average rate of return for day traders, and what does it take to get started?
  4. Trading

    How To Lock In An Exchange Rate

    Currency risk can be effectively hedged by locking in an exchange rate through the use of currency futures, forwards, options, or exchange-traded funds.
  5. Investing

    5 Tips On When To Sell Your Stock

    Learn when it might be time to sell your stock.
  6. Investing

    How Rising Rates Are Hammering Bank Balance Sheets

    The rising interest rates that have fueled bank stocks' rapid gains could also cause billions of dollars in unrealized losses
  7. Investing

    Why Late Trading Is Illegal

    Institutional investors got a sweet deal that soured retail investors' mutual fund returns.
  8. Investing

    2017 Outlook: A Record Start for Debt Issuance

    Gaining Speed : 11 companies including FedEx sold $20 billion of debt in the U.S. as 2017 trading began
  9. Investing

    Interpreting a Strategy Performance Report

    A strategy performance report can provide key metrics to decide if your strategy is a winner.
  10. Managing Wealth

    Achieve Optimal Asset Allocation

    Minimize risk while maximizing return with the right mix of securities and achieve your optimal asset allocation.
RELATED FAQS
  1. What is the difference between revenue and profit?

    Revenue is the total amount of income generated by a company. Profit is the bottom line or net income after accounting for ... Read Answer >>
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center