Trading position

Long & Short Position while Investing

There are buyers and sellers present in every financial market, and when you place a trade, you are also involved in either buying or selling a financial instrument. While trading, when you open a ‘buy’ position, then it means you are buying security or asset from the market, and while closing your position, you ‘sell’ the asset back into the market.

In every financial market, the ‘buyers’ are considered as ‘Bulls’ and think that the price of the asset will rise. The ‘sellers,’ on the other hand, are called ‘Bears’ and think the price of the asset will fall. While trading, you are given two options that are the ‘Buy’ and ‘Sell’ price. A Buy price is slightly more than the market price while the Sell price is low than the market price. For example,

• If you chose a ‘buy’ price, you would open a ‘long’ position
• If you chose a ‘sell’ price, you would open a ‘short’ position

The difference between the Buy and Sell price is called a ‘Spread,’ which the financial service provider uses to manage the trading position.

A ‘Long’ position is one in which you buy an asset hoping its price will rise, and you can sell the asset later for a profit; this strategy is also called ‘Buying’ or ‘Going Long.’ Buying an asset is not necessary as in derivative trading such as CFD trading, you trade on an underlying asset. You speculate that the price of the asset will rise.

A ‘Short’ position is one in which you might gain by selling an asset seeing that its price is falling or will fall. In this strategy, you are selling a borrowed asset expecting its price will fall, and you can buy it back at a lower price and get profit buy the difference between the selling price and buying price.  This strategy is also known as ‘Selling’ or ‘Going Short.’ While trading CFD, you are speculating on an underlying asset and gaining from a falling market.

You can opt for ‘Long’ or ‘Short’ strategy when opening a CFD account for trading. In CFD trading, you are Buying or Selling on contracts and speculate on the difference of price from the opening to closing of a position. You can speculate on numerous financial markets such as Forex, Stocks, Commodities, and Indices without needing to buy the asset.

In both Long and Short, you can use leverage, which means you deposit a small amount and get a larger market exposure due to leverage and gain or lose maximum value of the trade. Trading CFD helps you to magnify your profits, but there is also a risk of magnify losses.

Both the buyers and sellers manage the financial market and, consequently, the supply and demand that determines the price or value of the asset. All the time during the trading sessions, the buyers and sellers try to outweigh each other, and this is what causes fluctuation in the market. For example, when the buyers outweigh the sellers, then both the market and price of the asset rise and when sellers outweigh the buyers, then both the market and price falls. The effect of supply and demand on the market is known as ‘volatility.’

The Long and Short Position in Investment:

A long position means purchasing an asset, in the hopes that its price will rise in the future. An investor will take a long position predicting that the asset will gain value. The ‘short’ position is the opposite of ‘long’ and involves selling, knowing that the price of the stock will decrease in value.

• Long Position:

The long position and going long is mostly used when you are buying an options contract, which means you have bought and owned long position on an underlying asset in the option contract. Holding on to a long position symbolizes a Bullish view. It is a buy strategy where you hold on to the asset, and when the prices rise, you can sell the stock and gain profit.

• Short Position:

The short position is a fairly less popular trading strategy as the traders are relying on that the price of an asset decrease rather than increase. The investor has to borrow the shares from a financial service provider as oppose to buying them. The investment strategy of a short trade involves four stages, which are:

1. The investor borrows an asset from a financial service provider whose price is likely to decrease
2. The asset is sold in the open market.
3. The investor repurchases the asset once its price is lower than the one he initially sold it at
4. The asset or security is returned to the financial service provider

The greater the decline of the asset’s price, the more profit the investor will have.

The Key Differences between Trading Short vs. Long:

The basic rule is that the asset are owned in a long position and owed in the short position. For example If you buy 100 shares of a company, you are said to be 100 Long, as you have paid for the stocks in full. You are in a Bullish position and hope that the price of the stock will rise.

If you had sold the 100 shares without owning them, then you are said to be 100 Short, this is a Bearish position as you expect the value of the stock to fall, and thus you sell the asset to prevent any loss.

As an investor, if you want to go for a short position, you borrow the shares from a financial service provider and then sell them. You assume the price of the asset to fall lower so that you can repurchase the asset and do the settlement with the financial service provider.

Investors rarely go for a short position due to infinite risk, while in the long position, the risk or loss is limited as the price cannot fall further than a certain amount.

The information above is for education purposes only and cannot be considered as investment advice. Past performance is not reliable indicator of future results.