You’ve probably heard long and short trades mentioned frequently in trade talk. These are the two most common types of trading activity. Both involve the buying and selling of assets in the hopes of making a profit from future price changes on that asset.
As an investor, there are two positions open to you — long and short. A long position is a strategic move to buy an asset with the intention of selling it in the future, when its price rises.
Meanwhile, taking a short position is when you sell a borrowed asset, hoping the price of that asset will fall. If you're wondering how you can make a profit from this, and how long and short trades differ from one another, we're here to explain it all for you.
This article at a glance:
- Traders that go long expect that the price of the asset will rise, while short sellers expect that the price of the asset will fall.
- In both cases, the difference between buy and sell prices is the trader’s profit.
- Both long and short positions can be a part of your trading strategy.
What are long and short trades?
In day trading, a trader might take a long position on an asset, such as stock or currency, in anticipation of a future price rise. Let's go through a quick example. Expecting the price of a particular stock to increase, you choose to go long and buy 10000 USD worth of that stock at 10 USD a share.
If the price of that stock rises later in the day, say, to 10.50 USD per share, you can sell all of your stock for 10500 USD. Before taking commissions into account, you have made 500 USD in profit in this long position.
A short position is when you borrow an asset from a broker and then sell it on the market, in hopes that its price will fall. If it does, you can buy it back at a lower price. The difference between the price you sold the shares at, and the price you bought the shares back for, is where the profit comes from.
For instance, you might borrow 1000 worth of shares from your broker at 10 USD per share. You sell these to another investor, expecting the price to eventually drop. When the price does drop to, say, 9.60 USD, you decide to buy back the 1000 shares, paying 9,600 USD overall. The price difference of 400 USD is your profit.
Long and short positions: How do they differ?
Let's break down the key differences between long and short positions:
- A long position anticipates that the price of the asset will rise, while a short position anticipates that the price of the asset will fall.
- With a long position, you are the owner of the asset, while a short position means that you are selling an asset loaned to you by a broker. Keep in mind that you haven’t purchased the asset in a short position — you are selling something you don’t own.
- Short selling will generally require you to have a margin account with your broker.
- Traders with long positions on stock are entitled to dividends. Short sellers are expected to pay dividends to the owner from whom they borrowed the stock.
Using long and short trades in your trading strategy
Long and short positions can both be a part of your trading strategy. Long positions are taken when traders expect prices to rise, and when they expect prices to drop, they may short the security. Traders can also go long if they want to hold ownership of the securities they are trading
Meanwhile, shorting a stock is a way of balancing out the risk. It allows you to take an opposing position on an asset, and helps increase chances of making a net profit on your trades.
At the same time, shorting stocks is a riskier strategy, because of its potential to multiply your losses. This is why you should always do plenty of research, build a solid trading plan, and use a trusted broker. Remember to consider the possible outcomes on both positions, as well as the extent of potential loss, before you make your next trade.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorized to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.