In order to be successful in investments, it is of utmost importance to understand the dynamics of long positions and short positions. These are the different ways in which investors can benefit from—and capitalise on—changes in the prices of assets. They affect how investors think and act because they base all their moves on this information.
In this article, we will examine long and short position’s meanings and compare a long position vs a short position.
Understanding long position and short position
An investor can make two types of bets based on an asset's price movement: long and short positions.
A long position is a bet that the value of an asset may increase in the long run. Upon acquiring a long position, you would expect the asset’s value to increase in the near future. This is beneficial because if the value increases, you can sell it and earn a profit.
In contrast, a short position is a bet that the value of an asset will eventually decrease. In other words, the expectation is that the asset price will decrease after you sell it. This allows you to purchase it back when the value falls to a much lower price and earn a profit from the difference between the selling and purchasing prices.
These principles are widely applied across stocks, bonds, currencies, and futures and options and carry distinct risks as well as rewards, necessitating thorough understanding before implementation. In addition, both long position and short position can be executed through call options, providing alternative strategies for investors to leverage market movements.
Long position vs short position
The main difference between long and short positions is the direction in which an investor bets on the price of an asset moving.
When it comes to a long position, people buy assets with the hope that they will increase in value over time so that they can sell them later at higher prices and make profits. This method is ideal for those with a positive outlook on the future performance of assets and are ready to keep them for extended periods.
Conversely, investors enter into short positions by selling borrowed securities in anticipation of their decreasing prices, then purchase them back at lower costs, thereby earning profit margins. This tactic attracts individuals who think certain stocks are overvalued and will likely lose their value soon.
In addition, risk levels also distinguish long positions from short positions. Risks are limited to invested sums when one takes up long positions. However, since prices can go as high as possible with assets under shorting, there is a potential risk of limitless losses. Therefore, short positions usually appear riskier than long positions. Both long and short positions can also be executed through call and put options, which provide additional strategies for investors to capitalise on market movements.
To further emphasise the differences, we have listed down the key points regarding long position vs short position in the table below:
| Aspect | Long position | Short position |
| Directional bet | Expectation of stock price increase in the future (bullish) | Expectation of stock price decrease in the future (bearish) |
| Strategy | Buys stock | Borrows and sells stock |
| Profit mechanism | Profit from selling stock at a higher price than that purchased | Profit from buying back stock at a lower price than that sold |
| Risk level | Limited to the amount invested | Unlimited potential losses due to not recognising how high the price can rise |
Also read: Options
Examples of long position and short position
Long position: Let us assume that a person considers that company ‘X Ltd.’ has stocks worth much more than their current price and has the potential to grow rapidly. So, they buy 200 shares each at Rs. 150 from this company, spending Rs. 30,000. After a certain period, the person sold these shares for Rs. 250 per share. Thus, they were able to make a profit of Rs. 100 on each share (a total profit of Rs. 20,000 for all 200 shares).
Short position: In this scenario, let us assume a different individual who thinks otherwise about company Y Ltd., believing its stock is not only overpriced but also has minimal potential for growth compared to other companies listed on the same exchange. Thus, the investor opts for a short position by borrowing 150 shares of the company from a broker and promptly selling them at the current market price of Rs. 100 per share, earning Rs. 15,000. Eventually, as predicted by the investor, the value of the stock drops to Rs. 50 per share. Hence, the investor purchases all 150 shares back at Rs. 50, spending a total of Rs. 7,500 and returns the shares to the lender. Thus, they made a profit of Rs. 50 per share (a total profit of Rs. 7,500 for 150 shares).
Concluding thoughts
Long and short positions represent opposing strategies in stock market investing. Long positions predict price increases, whereas short positions anticipate declines. Profits in long positions come from buying for less and selling for more, whereas short positions profit from selling for more and buying for less. Thus, consideration of investment goals and risk tolerance is essential before choosing a strategy, and thorough research is critical for informed decision-making.
