Lock_In_Profits

Key Takeaways

• Locking in profits means realizing gains from investments by selling some or all securities, protecting against future price drops.
• This strategy converts paper gains into actual profits, insulating from potential market reversals.
• Investors lock in profits to reduce risk, balance portfolios, and optimize returns.
• Understanding risk tolerance and asset allocation helps in deciding when to lock in profits.

What Does Lock in Profits Mean?

Locking in profits is the act of realizing investment gains right away by selling a position or adjusting it to secure a portion of the return. Investors and traders use it to capture gains, reduce exposure to price swings, and manage risk across both short-term trades and longer-term holdings.

This article explains when locking in profits makes sense, why investors do it, and how the process works, including common strategies for taking money off the table.

How to Reduce Risk by Locking 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% to 30%, 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. Even if the stock ends up dropping 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.

Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.

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