LONG AND SHORT POSITIONS
Julius Mansa is a CFO consultant, finance and accounting professor, investor, and U.S. Department of State Fulbright research awardee in the field of financial technology. He educates business students on topics in accounting and corporate finance. Outside of academia, Julius is a CFO consultant & financial business partner for companies that need strategic và senior-level advisory services that help grow their companies và become more profitable.
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Day traders on the stock market have their own language. You're learning, but some of the terms take time to lớn understand & use correctly. If you're unsure about the terms "long" vs. "short," you're not alone. Many new traders get confused by these two words.
You initiate a long trade when you buy an asset with the expectation lớn sell it at a higher price in the future & make a profit. A short trade is initiated by borrowing an asset lớn sell it, with the intent to lớn repurchase it at a lower price, take a profit, và return the shares to the owner.
In along trade, you purchase an asset & wait to sell whenthe price goes up. "Buy" và "long" are used interchangeably.When you"re in a short trade, you borrow an asset, sell it, và hope lớn buy it back when the price goes down. "Sell" và "short" are used interchangeably.
| You buy the asset | You borrow an asset and sell it |
| You hold the asset khổng lồ sell higher than the purchase price | You wait for a lower price on the asset |
| You sell the asset and make a profit | You buy the asset back at a lower price, make a profit, and give it back khổng lồ the lender |
Long Trades
When a day trader is in a long trade, they have purchased an asset and are waiting khổng lồ sell whenthe price goes up. Day traders often use the terms "buy" and "long" interchangeably.
Similarly, some trading software has a trade entry button marked "buy," while others have buttons marked "long." The term often describes an open position. "l am long Apple" indicates you own shares of táo Inc. Và want lớn sell them at a higher price.
You might hear a trader say they are "going long" or "go long" lớn indicate interest in buying a particular asset. If you go long on (buy) 1,000 shares of XYZ stock at $10, the transaction costs you $10,000. If you can sell them at $10.20 per share, you receive $10,200. You get a nice profit of $200 before commissions. This is what you're hoping for by going long.
When you go long, your profit potential is unlimited. This means that the price of the asset could rise indefinitely.
If you buy 100 shares of stock at $1, that stock's price could jump to $2, $5, $50, or $100; however, day traders typically trade on much smaller price moves. You'll be more likely khổng lồ see long positions measured in cents rather than dollars.
The flip side lớn an increase in price is a decrease. If you sell your shares at $9.90, you receive $9,900 back on your $10,000 trade. You'd lose $100 và have lớn pay commission fees on đứng đầu of it.
The largest loss possible you could experience in this example is if the nội dung price dropped to $0, resulting in a $10 loss per share. Day traders work lớn keep risk and profits under tight control using options called a stop loss, a long call, và a long put. These options let you profit from multiple small moves & avoid large price drops.
You buy a long hotline to have the right lớn buy a stock (make another trader sell it lớn you) at a specific price; you buy a long put lớn have the right to lớn sell the stock (make another trader buy it from you) at a specific price. The stop loss is an order placed to lớn keep from losing too much on a trade if the price moves against you.
Short Trades
Shorting a stock is confusing to lớn most new traders. In the real world, you have lớn own something lớn sell it. You can enter short trades (sell assets before buying them) in the hopes that the price will go down so you can sell it to another trader.
You"ll hear traders use the terms "sell" và "short" khổng lồ refer to lớn the same action. Some trading softwarehas a trade entry button marked "sell," while others have one labeled "short." You use the term "short" to lớn describe an open position, as in, "I am short SPY," indicating you have borrowed (usually from your broker) S&P 500 (SPY) ETF và are ready khổng lồ sell.
When you short a stock, your profit potential is limited lớn the amount you paid, but the risk becomes unlimited because the price could rise indefinitely.
Similar khổng lồ the example of going long, if you go short on 1,000 shares of XYZ stock at $10, you receive $10,000 into your account, but this isn't your money yet. Your trương mục will show that you have negative 1,000 shares, which will need khổng lồ be replaced. Note that you're "short" 1,000 shares, not $10,000.
If you repurchase the shares at $9.60 per share, you will pay $9,600 for the 1,000 shares. You received $10,000 when you sold them (went short), so you make $400 before commission fees. If the stock price rises và you rebuy the shares at $10.20, you will pay $10,200 for those 1,000 shares. Here, you've lost $200 và still need to lớn pay broker fees.
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You can buy options lớn help you mitigate losses when you"re short. The stop loss is the same, but these options are used when you"re short—a stop loss, a short call, và a short put.
You buy a short hotline to have the right lớn sell a stock (make another trader buy it) at a specific price; you buy a short put khổng lồ have the right khổng lồ repurchase a stock (make another trader sell it lớn you) at a specific price. The stop loss prevents you from losing too much on a trade if the price moves against you.
Shorting, or selling short, allows you to profit if the market is moving up or down. You can sell and buy throughout the day on price movements, which is why many traders only care that the prices are moving, not which direction they are moving.
Special Considerations for Shorting
Shorting stocks is popular with professional traders. While it is a good tactic for making a profit, it tends lớn drive stock prices lớn drop too quickly when done on a large scale. In 2010, the Securities and Exchange Commission (SEC) imposed the alternative uptick rule, which restricts short selling from further driving down the price of a stock that has dropped 10% or more in one day from its previous closing price.
The SEC has also issued warnings about shorting stocks (or even just buying & selling them) based on what you may hear on social media, news outlets, or websites to lớn keep you and other retail investors from being used khổng lồ manipulate the market.
If a stock's price drops 10%, short sales become limited in that they can only occur if the price of the stock being shorted is above the current national best bid, or the highest price a buyer is willing khổng lồ pay nationally.
When vì chưng I Use a Long or Short Trade?
You would go long or use a long trade on a stock that you believe or know will rise in price. A long trade to a day trader is, at most, one trading day. If you find an opportunity to enter a trade, and you know the stock price will increase (and be desirable for another trader after you buy it), you'd go long on that stock.
You would go short on a trade if you know the price was going to decline. Your broker must borrow the shares from the owner (probably another broker) or lend them lớn you if they own them. If the broker can't borrow the shares for you, you're not going to lớn be able lớn short the stock. Stocks that just started trading on the exchange—called Initial Public Offering stocks (IPOs)—are not shortable (able to lớn be sold then bought).
Traders can go short in most financial markets. A trader can always go short in the futures và forex markets (different from the stock market). Most stocks are shortable in the stock market as well, but not all of them.
Whether you go long or short depends on the amount of risk you can take on, & your trading strategy & preferences.
There might be times when you're long on one stock and short on another. You might even find an occasion lớn short a stock, then go long on it. Some traders can keep shorting the same stock throughout a trading day.
The Bottom Line
When you're trading stocks, a long position is one where you buy a stock & try khổng lồ sell it at a higher price. You can think of it as holding a stock for a long time, even though it might only be a few minutes.
A short is when you borrow & sell a stock or stocks. Think of it as being short that number of stocks & needing to repurchase them.
Which one you use depends on the specific stock and the price kích hoạt when you are trading. They are both excellent strategies for turning a large number of small profits over time, but they both have their limitations. If you're long, you have lớn buy the stock and the options, then hope for a price increase. If you're short, you owe your broker several stocks no matter what the price ends at.
Using trade options can help you mitigate your losses for both long & short positions—just ensure that you don't risk more than you can afford khổng lồ lose, & stick khổng lồ your entry & exit strategies.
Frequently Asked Questions (FAQs)
What is a stop-loss order?
A stop-loss order is an order placed with a broker to buy or sell a stock when it reaches a specific price. It helps limit your exposure when trading so you don't thua too much money. It also means you don't have to lớn constantly kiểm tra on the performance of a stock since you have a measure in place lớn protect yourself.
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Can you short cryptocurrency?
You can short cryptocurrency, and there are many options for doing so. One is by using a cryptocurrency margin trading platform. You can also use a cryptocurrency futures market lớn short crypto. For example, you can short Bitcoin futures at the Chicago Mercantile Exchange.
