Investors and traders frequently use the terms “being long” or “going long” and “short” when referring to stocks or other investments. Although the terminology may be confusing, there is a significant difference between these two concepts, and understanding that difference is essential.
Do you want to know how they differ? Indicated here is the long and short of it!
Buy low, sell high: The long position.
Acquiring shares of stock for a long position is known as buying stock(s)believing that the stock’s value will increase in the future.
As an illustration, Gary decides to buy 100 Nike, Inc. stock shares. Garyhas chosen to invest in this business after careful consideration. His analysis showedthat Nike has annual revenue growth, strong management, and products.
Gary decided to purchase 100 shares at the closing price of $82.00 today.(The initial investment, excluding the broker’s fee, is 100 x $82.00 = $8,200.00)
The Nike stock now costs $87.00 per share, up $5.00 from the previous year.
Share of the initial investment made by Gary. Gary’s investment would now be worth as follows:
$100 x $87.00 = $8,700.00 (a gain of $500.00 minus the broker’s commission, assuming he decides to take part in to offer)
The short position: Buy Low, Sell High
Investors might utilize the short position strategy when they believe a short-term stock will decline, possibly in the coming days or weeks. Then, in a hurry, the investor borrows shares of stock from the investment firm to sell in a sell transaction to a different investor. Investment businesses typically maintain a sizable stockpile or can obtain stock on loan from another company to the investor. Naturally, the investoreventually must repay the borrowed stock. The shares will be borrowed and sold at a high cost, then purchased at a lesser cost and returned to the stockbroker.
As an illustration, Zeke decides to short-sell 100 Ford Motor Company shares because she has received speculations that their minivans would be widely recalled. Zeke believes that Ford’s in the coming weeks, the stock will decline due to the hefty costs of the recall and the inadequate media coverage.
Zeke borrows 100 shares of Ford stock from his broker as a result, and he sells it to someone else for an investor at the $34.00 closing price today. Short selling describes this action. Two weeks later, with the release of notices of the recall and other investors negatively selling their Ford shares, which caused the price dropped to $28.00 per share.
Zeke chooses to replace what he already has by buying 100 shares of Ford stock right away, loaned by his broker. Zeke’s purchase of shares is known as a “short cover.”
Here is what happened: Zeke sold 100 shares at $34.00: 100 x $34.00 = $3,400.00 (Short Selling). Zeke bought 100 shares at $28.00: 100 x $28.00 = 2,800.00 (Short Cover). The transaction cost him $2,800.00 (not including the broker’s fee), but he gained $3,400.00 from the sale. Overall, Zeke made a profit of $600.00. $3,400.00 – 2,800.00 = $600.00 (not including the broker’s fee).
Bottomline
The long and short positions that traders might take are very diverse. Therefore, before attempting to include employing long and short positions in their trading strategy, a competent investor will have understood the many benefits and drawbacks of each specific form of long and short positions.
