What Is a Position?
A position is the amount of a security, commodity or currency which is owned by an individual, dealer, institution, or other fiscal entity. They come in two types: short positions, which are borrowed and then sold, and long positions, which are owned and then sold. Depending on market trends, movements and fluctuations, a position can be profitable or unprofitable. Restating the value of a position to reflect its actual current value on the open market is referred to in the industry as “mark-to-market.”
The term position is used in several situations, including the following examples:
1. Dealers will often maintain a cache of long positions in particular securities in order to facilitate quick trading.
2. The trader closes his position, resulting in a net profit of 10%.
3. An importer of olive oil has a natural short position in euros, as euros are constantly flowing in and out of its hands.
Positions can be speculative, or the natural consequence of a particular business. For example, a currency speculator can buy British pounds sterling on the assumption that they will appreciate in value, and that is considered a speculative position. However, a business which trades with the United Kingdom will be paid in pounds sterling, giving it a natural long position on pounds sterling. The currency speculator will hold the speculative position until he or she decides to liquidate it, securing a profit or limiting a loss. However, the business which trades with the United Kingdom cannot simply abandon its natural position on pounds sterling in the same way. In order to insulate itself from currency fluctuations, the business may filter its income through an offsetting position, called a “hedge.”
Spot vs. Futures Positions
A position which is designed to be delivered immediately is known as a “spot.” Spots can be delivered literally the next day, the next business day, or sometimes after two business days if the security in question calls for it. On the transaction date, the price is set but it generally will not settle at a fixed price, given market fluctuations. Transactions which are longer than spots are referred to as “future” or “forward positions,” and while the price is still set on the transaction date, the settlement date when the transaction is completed and the security delivered date can occur in the future.