You might hear these terms from news channels or investors” long and short positions”. Therefore you’re here to know about it. Many new investors or traders got confused about these two words.
And if you’re one of them, you won’t more after reading this blog.
In the stock market, traders and investors can take two types of positions: long positions and short positions. They either can go long that is buying a stock and go short that is selling a stock.
In a long position, investors make a profit when asset price goes up. And in a short position, they make a profit when asset price goes down.
You’re long when you buy a stock with hoping that its price will go up in the future and selling higher than bought price to making a profit. Your position is short when you think the stock price will go down, selling a stock that is borrowed from a broker and buying in the future at a lower than selling price.
You have a long position when you buy a stock with an expectation to its price will rise. Every typical purchase of your asset is a long position.
If someone is saying “I am long TCS” they are indicating that they own TCS. You make a profit in a long position when asset prices go up.
Suppose you buy a 100 share of ABC at Rs.10, your cost of buying is Rs.1000. At a later date, its price goes up to Rs.15, you sold at that price and receive Rs.1500. Your profit on this trade is Rs.500.
In a long position, your profit-making potential is unlimited however losing money is limited.
As an above example, you sold at a market share price of Rs.15. Although its price can go up to Rs.20, Rs.30, or Rs.50. So making a profit is unlimited.
If you sold stock at Rs.8, so you’d lose Rs.200. The largest amount you can lose is your whole investment that is Rs.1000. However this risk you can manage through a stop-loss order.
A stop order is just an execution order in which you give an order to your broker to sell the asset after reaching a specified price.
You have short positions when you sell assets that you do not own. Short positions benefit from decreased prices of an asset.
Got confused, you might be wondering how can I sell something that I don’t own.
Let understand with an example; somehow you got to know that in a few days mango prices would decrease.
Your friend has a mango shop, so you borrowed 1 kilo of mango from him. You didn’t pay any money to him rather you owe 1-kilo mango.
You sell 1-kilo of mango to the buyer and receive Rs.1000.
As you know, after 7 days mango prices drop to Rs.900 from Rs.1000. Thereafter, you bought 1-kilo of mango at a price of Rs.900 from another shop and gave back your borrowed 1-kilo of mango to your friend.
You made a profit from decreasing the price of a mango. Without investing any of your money you made Rs.100.
Again you might be wondering, I understand what short trade looks like but how can someone sell a stock without owning it.
As above example, you borrowed from your friend and in a stock market, you can borrow stocks from a broker that they own. To borrow from a broker you need to deposit some cash in a margin account.
In a short position, your profit-making potential is limited, and losing money is unlimited.
Suppose you borrowed 100 shares from a broker of ABC ltd, sell them in the market, and receive Rs.10,000. After a few days, its price drops to Rs.9000. If you sell it then you’ll make a profit of Rs.1000.
Although its price goes up to Rs.5000, Rs.3000 or even Rs.0. If its price drops down to Rs.0 then your profit is 100%. so your profit is limited.
On the other hand, if its price goes up to Rs.11,000 then you’ll lose Rs.1000. However, its price can go up above Rs.11,000 like Rs.20000,Rs.30,000 or Rs.50,000. So your loss of money in a short position is unlimited.
Now you understand what is long and short positions and how their trade looks like in the stock market. If your motive is to make a profit in the short term so you can use both positions. Long-term investors don’t need to take short positions in a stock market. It’s all up to you what position is best for you to make money in a stock market.