What are Long and Short Positions?

Example

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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.read more 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.read more when he owns the security or asset, which means he has paid the amount to buy the asset or security. For instance, when a person buys an asset or stock, he longs for 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 an asset he does not own, it is said to have a short position. He will get a profit when the price of the asset falls. However, the seller will sell at a higher price, wait until the price falls, and then repurchase the asset from the market at a lower price to close the position. For instance: for 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 a 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.read more.

Long Position: Buy Low, Sell High

Purchasing assets in a long position is the action of buying shares of an 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 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 stock’s price is $85 per share, a hike of $5 per share. The value of Mr. X’s investment would be: 1000 * 85 = $85000

The long position will book the gain of $5000 by Mr. X by using the Buy low Sell high concept.

Short Position: Sell High, Buy Low

It is the technique by which investors expect 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 many shares on hand or borrow from other companies to provide loans to an investor. However, an investor returns the shares they borrow. The main intent is to sell the stock at a higher price and then buy it back at a lower price.

Long Position vs. Short Position

Advantages

  • 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.read more option through this position.It provides liquidity to the funds and conveniently adjusts the market’s risk.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 their meaning. Here we discuss its example along with its key differences. You can learn more from the following articles –

  • Long PutShort CoveringNaked ShortingShort Selling