Stock Market: Long Or Short
When it comes to trading in the stock market, you will come across terms such as long term trading and short term trading. These terms refer to whether a trade was made with intend to buy first or sell first. A long trade is when you buy stock, expect the price to rise therefore selling at a profit. Short trade on the contrary is when you sell before you buy in the hope to repurchase at a lower price and make a profit.
Long Position vs. Short Position: What’s the Difference
When discussing about stocks, analysts and market makers often refer to an investor having long positions or short positions. Long and short positions are a reference to what an investor owns and stocks an investor needs to own.
Understanding a Long Position vs. a Short Position
Long position: when an investor has a long position, it means that they have bought and own those shares. Think of “long” as another word for “buy”. If you are “going long” with a stock, it means you are buying it. When trading and decide to go long, you expect the share price to go up. This is way when time comes to sell you are able to do so at a profit. Going long has the potential of offering unlimited profits, as the price of the asset can rise indefinitely
- Example: If you go long on 1,000 shares of TAC at £10, meaning you spend £10,000. Assuming the share price goes up to £10.20 and you sell, you will now have £10,200 making your profit £200 (minus commision)
However keep in mind the market doesn’t always have good days where everything is high. There will be days where the market will drop resulting in losses.
Short position: shorting the market is when you sell first in the hope to repurchase again at a lower price. Now you might be wondering how do you sell first and then buy again ? This strategy is done because of how the stock market works. It is all based on offer and demand, meaning as soon as there is demand to sell the stock price will decrease.
- Example: Investor A goes to Investor B in order to “borrow” a share worth £10. Investor A, then sells the stock and is left with the £10 and will wait until the share price decreases. Once the price has dropped to e.g £7, investor A, buys it again. They will then return the share to investor B, while paying a fee and the rest is profit.
This is a very high risk strategy, as the stock market will not always for down. Instead, it can also go up. For example, the same strategy is followed and a share is borrowed, however if the price is up this strategy will result in a loss.
Every trader/investor should understand what long and short market mean. Both these strategies are used by investors to achieve different results.