What is an 'Opening Transaction'

Opening transaction refers to the act of initiating a trade. It can involve taking a new position in a specified security or the entrance into a variety of different derivative contract positions which remain open for a specified timeframe.

BREAKING DOWN 'Opening Transaction'

An opening transaction is the initial step in a trading activity that involves the purchase of an asset or financial instrument. It generally - but not always - involves a closing transaction at a later point in time, which may be on the same day for an intra-day trade, or days, weeks or months later for a longer-term investment. An opening transaction can have different considerations for different types of investments and considerations will be significantly different for publicly traded securities versus derivatives.

Publicly Traded Securities

Investors may choose to invest in a publicly traded security through an opening transaction with various motivations. Generally investors will buy a security for its capital appreciation or income potential. Investors may see long-term potential in a security due to its growth or value characteristics over time. These motivations can be driven by a security's revenue estimates, earnings potential or fundamental ratios.

Investors and more specifically day traders or technical analysts may choose to enter a security position through an opening transaction for its short-term gains. Short-term investors will typically enter an investment with a more defined timeframe, seeking to close the position relatively quickly to take advantage of favorable short-term volatility. In this scenario an investor may open and close a transaction within a matter of hours, days or weeks.

Derivatives

An opening transaction that enters an investor into a derivative contract has a relatively more important meaning for consideration than an opening transaction for a publicly traded security. When an investor enters a derivative position they have a specified amount of time for which to generate profit from the investment. This requires them to more closely maintain analysis of the position throughout its life.

In an American option contract after an opening transaction an investor has the right to exercise that contract at any time up until the expiration. After expiration the contract is considered closed. In a European option, the option holder can exercise the option only on the expiration date. In both American and European options the investor can also trade their option in the market to close out the position.

In a futures contract an investor buys the derivative for execution on a specified date. They have the option to sell the contract on the open market up until the expiration. If they hold the contract until the expiration then they are obligated to meet the demands of the contract.

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