What Is the Difference Between Short and Long Positions?
Understanding the fundamentals of going short or going long in trading is inevitable for all new traders. Taking short positions or long positions scales down to whether you think a stock will go up or go down, in relation to another stock.
In simple terms, if you believe that a stock will appreciate, you will basically go long on the underlying stock. You will go short, on the other hand, if you think that the stock will depreciate. If you need to get more info about shorting stocks, shorting cryptocurrencies, short positions, long positions, and when to utilise them, keep reading this article to the end to find out more info about long and short selling.
What is a Position in the Stock Market?
When it comes to options, currencies, commodities and stocks; market makers and analysts usually refer to a trader having short positions and long positions. Short and long in financial field can denote various things. However, in this context, short positions and long positions refer to what a trader owns as well as the stocks that he or she needs to own, rather than referring to the ordinary length.
Short and Long Positions
In the trading world, you can utilise two forms of positions: short and long. You can either purchase an item (going long) or sell the asset (going short). The experts further categorise short and long positions into two types of options: the put and call. Here, a trader can enter into a long call, long put, short call, or even short put. Additionally, you can combine short and long positions into complicated hedging and trading strategies.
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When you decide to enter into a long position, you basically hope that the price rises. As a trader in a long position, you’ll only benefit when the price increases. The ordinary stock buy is a type of long stock asset buy. Whenever you decide to go long in stocks, it means that you are buying the shares at low prices hoping to sell them later at much higher prices. In this type of investment, a trader that has 1,000 shares of a given company is said to be long 1,000 shares.
When you take a long position in a firm, you will ordinarily hold the shares and then sell them after the rise in price. When the particular company shares drop, you may buy additional shares at lower prices hoping that the price will rise again soon. Some companies give dividends to their members that hold long positions in stocks. The good thing about trading is that you can also go long in crypto.
A short position is typically the direct opposite of a long position. As a trader, you hope for a drop in the price of stocks as it benefits you. However, short selling is quite complicated in comparison to buying the asset. When it comes to a short position, you hope to benefit from a stock price drop. You achieve this by borrowing a Y number of shares of a particular firm from a stockbroker and then later selling them at the current market price.
Here, you have got an open position for the Y number of shares from the broker, that needs to be sold shortly. When the price drops, you can buy the Y number of stock shares for a smaller amount than you sold earlier. The excess cash here is your profit.
This idea may seem challenging to understand, but it is indeed an artless process. Let us check at a simple example that will make you understand the concept deeply. Assume that stock X is retailing at $40 for every share. For various reasons, you foresee a decline in price, and you decide to go short. This short selling will work, as shown below:
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You first need to set aside a deposit as collateral for your brokerage firm to loan about 100 shares of the stock.
When you get a loan of the 100 shares from the broker, you need to sell them at $40, the current market price. Now, instead of the shares, you have money totalling to $4,000 ($40X100) from the sold shares. You’re said to be in a short position because you owe the broker 100 shares.
Now, assume that the stock price starts falling within a week, and the price of a share has dropped up to $20. Since you do not expect the price to go down further, you decide to go short in stocks.
You now purchase the 100 stock shares at $2,000 ($20X100). You return the 100 stock shares to the broker to repay the loaned shares. By paying back the share loan, you’re no longer in short selling.
At the end of the sale, you have been able to make a cool $2,000 in your short selling. You got $4,000 by selling the 100 shares and later repurchased the 100 shares at $2,000.
Notably, you will be happy to realise that you can even consider shorting crypto currencies.
What Makes a Successful Position?
Although position trading seems quite artless, it entails undertaking a detailed technical and essential analysis, as well as in-depth knowledge of the markets. Here are some few tips to consider if you need to have a successful position.
Resistance and Support – it helps you to identify when a stock price is more likely to increase to an upward trend or reverse in a downward trend. Resistance is the point at which the stock’s price stops rising, while support is the point where the stock’s price cannot fall below.
Range Trading – it’s a strategy to incorporate in markets that moves down and up with no recognisable trend.
Breakout Trading – the best strategy to incorporate in the initial stages of a trend, but you need to define the support and resistance.
Pullback trading strategy – it allows you to buy low and sell high, provided that the price of the stock recuperates from a brief fall.
Timing in Long and Short Positions
As a trader, you need to take action at the right time, always to guarantee enormous profits. The most successful traders purchase stocks because they expect a profit from the sale, primarily through dividends and price rise – over months or even years. What this means is that you can take your time in buying as well.
In some cases, there are good reasons that trigger you to go short or long in stocks. It is always advisable to come up with reasons that would make you sell or buy a stock. Here, it’s not about the stock price fluctuations, precisely not the short term, but the crucial changes to a company that impacts the company’s growth in the long run.
For instance, the firm loses a major stakeholder, the manager starts taking the company in the wrong direction, a key rival emerges out of the blues, or even the investing thesis fails to work as planned. These are some of the factors that determine your timing.
Warnings with losing shorting CFD positions
In order to make profits when trading, you need to have several skills to enable you to enter into the market at the ideal time, locate the right risk vehicles, and exit the market before things get worse. Most traders fail or lose trades on the exiting stage part.
While exiting a trade at the appropriate period is not difficult, it necessitates close price action observation. Also, it would help if you searched for clues that foresee a huge-scale trend reversal. In addition to using the buy-and-hold strategy, you also need to include the exit timing mechanism to avoid losing trades regularly.