long position vs short position

Long position vs short position – How to interpret?

For a beginner trader, it may be easy to get lost quickly listening to a conversation by seasoned traders. Trading and investing involve lots of technical terms and specific jargon. Sometimes, you hear traders say “I’m long on company X” or “short on company Y.” What do traders mean by long positions and short positions?

Learning objectives

  • Understand the distinction between long positions and short positions.
  • Recognize the rights and obligations involved in such positions.

Going long on an asset

You are said to have a long position in a company (or an asset) if you hold shares of that company (or own the asset). For example, you can have a long position in Spotify by using your funds to purchase the company’s shares. This would be a cash outflow from your perspective. By having a long position, you are entitled to both cash-flow rights and voting rights. For example, you might receive dividends in regular intervals and benefit (or lose) from an increase (decrease) in the share price. You can also vote in matters related to the company’s management.

Going short on an asset

Conversely, when you short sell shares of a stock (or a security in general), you are said to hold a short position in that stock. In this case, you don’t own the shares but borrow them from another investor to sell them in the market. This way, you can raise proceeds. This would be a cash inflow from your perspective. However, you should close the short position at some point in the future. This can be done by purchasing the same of amount shares and returning them to the investor whom you borrowed in the first place. Furthermore, you are obliged to compensate the original investor for any dividends paid during the period when you have the short position.

Sometimes, a short position can be used to finance a long position. For example, you can raise proceeds by short selling shares of Facebook. Then, you can use those proceeds to purchase shares of Spotify. In such a scenario, you would hope that the share price of Facebook would go down and the share price of Spotify would go up, in which case you would make a profit. In general, combinations of long positions and short positions form the basis of exploiting arbitrage opportunities.

Overall, traders and investors go long in securities that they expect will increase in price and short in those that they believe will lose value.

What is next?

This post is part of the series on trading basics. The next post in the series explains the concept of short selling in greater detail. In the previous post, we discussed the distinction between bid prices and ask prices.

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