Long Trades Vs

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Long and Short Positions

In the trading of assets, an investorEquity TraderAn equity trader is someone who participates in the buying & selling of company shares on the equity market. Similar khổng lồ someone who would invest in the debt capital markets, an equity trader invests in the equity capital markets & exchanges their money for company stocks instead of bonds. Bank careers are high-paying can take two types of positions: long & short. An investor can either buy an asset (going long) or sell it (going short). Long và short positions are further complicated by the two types of optionsStock OptionA stock option is a contract between two parties which gives the buyer the right to buy or sell underlying stocks at a predetermined price and within a specified time period. A seller of the stock option is called an option writer, where the seller is paid a premium from the contract purchased by the stoông xã option buyer.: the Call & put. An investor may enter into lớn a long put, a long hotline, a short put, or a short điện thoại tư vấn. Furthermore, an investor can combine long and short positions into complex trading & hedging strategies.

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Long Positions

In a long (buy) position, the investor is hoping for the price to lớn rise. An investor in a long position will profit from a rise in price. The typical stoông chồng purchaseStoông xã AcquisitionIn a stochồng acquisition, the individual shareholder(s) sell their interest in the company to lớn a buyer. With a stoông xã sale, the buyer is assuming ownership of both assets & liabilities – including potential liabilities from past actions of the business. The buyer is merely stepping inkhổng lồ the shoes of the previous owner is a long stock asphối purchase.

A long gọi position is one where an investor purchases a hotline option. Thus, a long hotline also benefits from a rise in the underlying asset’s price.

A long put position involves the purchase of a put option. The ngắn gọn xúc tích behind the “long” aspect of the put follows the same xúc tích of the long điện thoại tư vấn. A put option rises in value when the underlying asphối drops in value. A long put rises in value with a drop in the underlying asset.

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Long Position Profits

In a long asmix purchase, the potential downside/loss is the purchase price. The upside is unlimited.

In long calls và puts, the potential downsides are more complicated. These are explored further in ouroptions case studyOptions Case Study – Long CallTo study the complex nature and interactions between options and the underlying asmix, we present an options case study. It"s much easier to lớn.

Short Positions

A short position is the exact opposite of a long position. The investor hopes for, và benefits from, a drop in the price of the security. Executing or entering a short position is a bit more complicated than purchasing the asphối.

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In the case of a short stoông xã position, the investor hopes to lớn profit from a drop in the stochồng price. This is done by borrowing X number ofsharesStockWhat is a stock? An individual who owns stoông xã in a company is called a shareholder & is eligible to clayên part of the company’s residual assets and earnings (should the company ever be dissolved). The terms "stock", "shares", and "equity" are used interchangeably. of the company from a stockbroker và then selling the stoông chồng at the current market price. The investor then has an open position for X number of shares with the broker, that has khổng lồ be closed in the future. If the price drops, the investor can purchase X amount of stoông xã shares for less than the total price they sold the same number of shares for earlier. The excess cashCash EquivalentsCash và cash equivalents are the most liquid of all assets on the balance sheet. Cash equivalents include money market securities, banker"s acceptances is their profit.

The concept of short selling is often difficult for many investors to lớn grasp, but it’s actually a relatively simple process. Let’s look at an example that will hopefully help clarify things for you. Assume that stoông chồng “A” is currently $50 per mô tả. For one reason or another, you expect the stoông chồng price lớn decline so you decide to sell short lớn profit from the anticipated fall in price. Your short sale would work as follows:

You put up a margin deposit as collateral for your brokerage firm to lớn loan you 100 shares of the stoông xã, which they already own.When you receive the 100 shares loaned to lớn you by your broker, you sell them at the current market price of $50 per giới thiệu. Now you no longer have any shares of the stoông chồng, but you bởi have the $5,000 in your account that you received from the buyer of your 100 shares ($50 x 100 = $5,000). You are said lớn be “short” the stoông xã because you owe your broker 100 shares. (Think of it as if you said khổng lồ someone, “I’m 100 shares short of what I need khổng lồ pay bachồng my broker.”)Now assume that, as you anticipated, the stock’s price begins to lớn fall. A few weeks later, the price of the stock has dropped all the way down lớn $30 a nói qua. You don’t expect it lớn go much lower than that so you decide lớn close out your short sale.You now buy 100 shares of the stock for $3,000 ($30 x 100 = $3,000). You give sầu those 100 shares of stochồng khổng lồ your broker to lớn pay hlặng back for (replace) the 100 shares he loaned you. Having paid back the 100 chia sẻ loan, you are no longer “short” the stochồng.You have sầu made a $2,000 profit on your short sell trade. You received $5,000 when you sold the 100 shares your broker loaned you, but you were later able to buy 100 shares to pay hlặng baông xã for only $3,000. Thus, your profit is figured as follows: $5,000 (received) – $3,000 (paid) = $2,000 (profit).

Short stoông chồng positions are typically only given to accredited investors, as it requires a great khuyến mãi of trust between the investor và broker lớn lend shares to lớn execute the short sale. In fact, even if the short is executed, the investor is usually required khổng lồ place a margin deposit or collateral with the broker in exchange for the loaned shares.

Other Short Positions

Short call positions are entered into lớn when the investor sells, or “writes”, a Điện thoại tư vấn option. A short Hotline position is the counter-các buổi party lớn a long Hotline. The writer will profit from the short Call position if the value of the Điện thoại tư vấn drops or the value of the underlying drops.

Short put positions are entered into lớn when the investor writes a put option. The writer will profit from the position if the value of the put drops or when the value of the underlying exceeds the strike price of the option.

Short positions for other assets can be executed through a derivative known as swaps. A credit mặc định swap, for example, is a contract where the issuer will pay out a sum lớn the buyer if an underlying asmix fails or defaults.

The Bottom Line

There is a wide variety of long and short positions that traders may adopt. A knowledgeable investor will have grasped the many advantages & disadvantages of each individual type of long and short positions before attempting to incorporate using them inkhổng lồ his or her trading strategy.

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Additional Resources

Thank you for reading CFI’s guide on Long & Short Positions. To keep learning and developing your knowledge of financial analysis, we highly recommover the additional CFI resources below: