What are Long and Short Positions?
Long and Short Positions are two sides of the trade taken place by two or more parties to contract in between them, where long position denotes simply long which is the buying of a securities or stock or currency or commodity with the expectation of earning profit and short position denotes the situation where a trader sells security or commodity with the intention of repurchasing it later at a lower rate.
A position determined in the financial assetFinancial AssetFinancial assets are investment assets whose value derives from a contractual claim on what they represent. These are liquid assets because the economic resources or ownership can be converted into a valuable asset such as cash. mentions the quantity of an asset owned by the person. A person is considered to have a long positionLong PositionLong position denotes buying of a stock, currency or commodity in the hope that the future price will get higher from the present price. The security can be bought in the cash market or in the derivative market. The course of action suggests that the investor or the trader is expecting an upward movement of the stock from is prevailing levels. when he owns the security or asset, which means he has paid amount to buy the asset or security. For instance, when a person buys an asset or stock, he longs a stock. A long position holder has many benefits of owning this right to long a stock when the price of the asset increases; he can sell it at a higher amount. It gives unlimited profit potential to investors. When the person sells the asset that he does not own, it is said to have a short position. He will get profit when the price of the asset falls. However, the seller will sell at a higher price and wait till the price falls and then repurchase the asset from the market at a lower price to close the position. For instance: a manufacturer who holds an inventory of aluminum, The risk is that the price may fall, He will protect himself by selling futures short, and if the price falls, he will lose money as per inventory value but will get profit or gain from his short positionShort PositionA short position is a practice where the investors sell stocks that they don't own at the time of selling; the investors do so by borrowing the shares from some other investors to promise that the former will return the stocks to the latter on a later date..
Long Position: Buy Low, Sell High
Purchasing assets in a long position are the action of buying shares of asset expecting the value of the asset will increase over time. It is a strategy where the person buys stocks at a low price and sells them at a high price.
- Say, Mr. X decided to buy 1000 shares of stock in Adidas as he researched for the company’s strong fundamentals and growth.
- Mr. X purchases 1000 shares at a closing price of $80 per share, which means 1000 * 80 = 80000.
- One year later, the price of the stock is $85 per share, a hike of $5 per share. The value of Mr. X’s investment would be: 1000 * 85 = $85000
The gain of $5000 will be booked by the long position by Mr. X by using Buy low Sell high concept.
Short Position: Sell High, Buy Low
It is the technique by which investor expects that the value of an asset will decrease for a short duration, perhaps in the next few weeks. In this process, the investor borrows the shares from the investment company to sell to another investor. Companies have a large number of shares on hand or borrow from other company to provide loan to an investor. However, an investor returns the shares they borrow. The main intent is to sell the stock at a higher price then buy them back at a lower price lately.
Long Position vs. Short Position
Both positions are exactly opposite to each other. If an investor has opted for a long position, it means that an investor has owns the shares of stock. By contrast, if the investor owes the stocks to someone but not as the owner of the stock, it is considered a short position. In the case of options, holding or buying a put or call option is a long position, the investor has the right to buy or sell to the specified person at a certain price. Conversely, writing a call or selling or put option is considered as a short position where the writer must sell or buy from the long holder or buyer of a certain option. Long positions are considered to be less complicated as compared to short positions.
- It is a hedging tool that reduces the overall market exposure of a portfolio.
- The investor acquires an arbitrageArbitrageArbitrage in finance means simultaneous purchasing and selling a security in different markets or other exchanges to generate risk-free profit from the security's price difference. It involves exploiting market inefficiency to generate profits resulting in different prices to the point where no arbitrage opportunities are left. option through this position.
- It provides liquidity to the funds and adjusts the risk of the market conveniently.
- Exposure to short and long positions can reduce a portfolio’s overall volatility.
- These two positions allow the holders to mitigate the risk with overall production value.
This has been a guide to what are Long and Short Positions and its meaning. Here we discuss its example along with its key differences. You can learn more from the following articles –