You effectively own a security if you hold a “long” position in it. Investors hold “long” positions in securities with the hope that the stock’s value will rise in the future. The inverse of a “long” position is a “short” position.

A “short” position is one in which you sell a stock that you do not own. Short-selling speculators believe the stock’s price will fall. If the price lowers, you can buy the stock at a reduced price and profit. If the stock price rises and you buy it at the new, higher price, you will lose money. Short selling should be done by an experienced investor.

In this blog article, we are going to look at the ins and outs of long and short positions, the differences between them, and how to make informed investment decisions. You will possess a better grasp of long and short positions at the end of this post and will be able to make more educated financial choices.

Define long and short positions:

 An investor who is long (buying) a stake anticipates an increase in price. A price increase will be profitable for an investor holding a long investment. Long stock asset purchases are the norm when buying stocks.

An investor who acquires a call option is said to be in a long call position. Therefore, a long call also profits from an increase in the value of the underlying asset.

The purchase of a put option constitutes a long put position. The “long” component of the put makes sense in the same way as the long call does. When the value of the underlying asset decreases, the value of a put option increases. With a decline in the underlying asset, a long put gains in value.

The complete opposite of a long position is a short position. The investor profits from and hopes for a decline in the security’s price. It’s a little trickier to execute or open a short position than it is to buy the asset.

With a short stock position, the investor expects to make money if the stock price declines. This is accomplished by borrowing a certain number of shares from a stockbroker, then selling the stock at the going rate. The investor now has an open position with the broker for X shares that must be closed in the future. If the price falls, the investor can buy X number of stock shares for less than the total price for which they sold the same number of shares before. The profit will be more or excess cash.

Long v/s Short Position:

Long position:

• Market Outlook:The market outlook is bullish. The investor anticipates that the asset’s value will rise.
• Action: The investor purchases the asset (or a contract representing it) with the purpose of eventually selling it at a higher price.
• Profit Mechanism: Profit is realised when the asset’s price rises, allowing the investor to sell at a higher price than the initial purchase price.
• Risk: The biggest risk is that the asset’s price falls instead of rising, resulting in possible losses.

Short position

• Market Outlook:The market outlook is bearish. The investor anticipates the asset’s price to fall.
• Action: The investor sells an asset (or a contract reflecting it) that they do not now own with the intention of repurchasing it at a lower price later.
• Profit Mechanism: Profit is realised when the asset’s price declines, allowing the investor to repurchase the item at a cheaper price than when it was first sold.
• Risk: If the asset’s price climbs rather than falls, the investor may incur losses since they must repurchase it at a higher price.

Example of long Position:

Let’s suppose an Indian investor believes Company A’s stock is inexpensive and has important growth potential. The investor spends Rs. 10,000 to purchase 100 shares of Company A stock at Rs. 100 per share. Over time, the investor’s prediction comes true, and the stock price of Company A climbs to Rs. 150 per share. The investor subsequently decides to sell the shares, earning Rs. 50 per share, for a total profit of Rs. 5,000. This is an example of a long position, in which investors bet on the stock price rising and was paid when it did. 

Short Position Example: Sell High, Buy Low:

A fundamental instance of a short position would be selling a stock at a high price and then acquiring it back at a lower price. Assume an investor believes that Company B’s stock is overpriced and has restricted growth potential. The investor borrowed 100 shares of Company B’s stock from a broker and promptly sells them at the current market price of Rs. 200 per share, earning Rs. 20,000.

Eventually, the investor’s prediction comes true, and Company B’s stock price falls to Rs. 150 per share. The investor then buys back the 100 shares at Rs. 150 a share, for a total of Rs. 15,000, and returns the borrowed shares to the broker. The investor profited Rs. 50 per share, or Rs. 5,000 in total, by selling the stock high and buying it back low. This is an example of a short position, in which the investor wagered that the stock price would decrease and was rewarded with a profit when it did.

Combining Long and Short Positions:

Long and short positions are utilised by investors to accomplish distinct goals, and both long and short positions are frequently established concurrently by an investor to leverage or produce revenue on a security.

Long call option positions are bullish because the investor anticipates the stock price to rise and purchases calls with a lower strike price. An investor can protect their long stock position by establishing a long put option position, which provides investors the right to sell their stock at a fixed price. Short call option contracts provide a similar method to short selling without the requirement to borrow the stock.

This point of view enables the investor to receive the option premium as income while also having the option to deliver their long stock position at a guaranteed, generally higher, price. A short puts position, on the other hand, allows the investor to buy the stock at a certain price while collecting the premium.

These might be merely some instances of how mixing long and short positions in multiple assets can build leverage and protect a portfolio against losses.

Is it recommended to take a long or short position in financial assets?

This is determined by the asset in question as well as the circumstances of the transaction. Going short is generally riskier than going long because there is no cap on how much you can lose and, in most circumstances, these positions require borrowing from a broker and paying interest for the privilege. Furthermore, if your broker issues a margin call and you do not deposit extra cash or securities in a timely manner, your losing position will be closed.

Why do you prefer short-term positions?

An investor expects may short a stock or other security if they anticipated its value was about to fall. In the case of options, they would be short if they sold an option and collected the premium rather than paying it.

The Bottomline 

Investors and traders frequently use the terms “long” and “short.” And they have absolutely nothing to do with length. Being or going long in stocks fundamentally implies purchasing a stock and benefitting from its rising value. Being or going short, on the other hand, entails betting on the stock declining in value and profiting from it. This is typically accomplished by borrowing a security from a broker, selling it, and then later buying it at a lower price, returning it to the broker, and pocketing the difference, if everything goes as planned.

Long and short have distinct connotations when you have options. You can either purchase or sell a call or put option. Buyers are said to be long, while sellers are considered to be short.

Most Asked Questions:

• What is the distinction between a long and a short option?

The difference between going long and going short is brief but significant: Longing a stock means you own it and will profit if it rises in value. Being short a stock means you have a negative position in it and will profit if it declines.

• What is the difference between long and short position hedging?

In a short-hedged position, the company seeks to sell a commodity at a set price in the future. The entity looking to purchase the commodity takes the contract’s opposite position, known as the long-hedged position.

• What is the definition of a long short position strategy?

Long-short equity is an investment strategy in which long positions are taken in underpriced equities and short positions are taken in overpriced stocks. Long-short investment tries to supplement traditional long-only investing by profiting from securities identified as both under-valued and over-valued.

• What are the advantages of the long short strategy?

Long/short funds have been created to maximise market upside while reducing downside risk. For example, they may hold inexpensive equities that fund managers predict will rise in value while simultaneously shorting overpriced stocks to reduce losses.