Locking in profits refers to the realization of previously unrealized gains incurred in a security by closing all or part of the holding. This is also known as taking money off the table or realization. When an investor holds an open position, they may accrue unrealized gains or losses that are not realized until the position is closed out. This means that they will not receive the gains until they decide to sell.

There are several reasons why investors may choose to lock in profits, including reducing risk and protecting the profits of an investment. As the market changes, the value of the investment may decrease and cause the investor to lose their unrealized gains. By locking in profits, investors are able to minimize their potential losses and still benefit from their holdings.

Investors may also use the locking in profits strategy to lock in partial profits from a security. This allows them to take some of the profits from their investment while still leaving some of their holdings in the security. This strategy helps them diversify their investments and spread out the risk profile of the portfolio.

The locking in profits strategy is not only applicable to long term holdings but can also be used in short term investments. For short term investments, investors may take advantage of market movements to lock in quick profits. For example, they may take a position and then immediately close out after the stock has surged in a short time frame.

Regardless of whether investors choose to lock in profits to reduce risk or realize quick profits, the strategy is often used to improve portfolio performance. This strategy allows investors to benefit from the market’s movements without having to stay in their positions for the full duration.