Investors and traders often talk about being “long” or “long” on a stock, or they may say they are “short” on a stock or another investment. The jargon might be opaque, but the difference between these two terms couldn’t be more different, and it helps to know the distinction.
Want to know the difference between the two? Here is the long and the short!
Be long or short
The distinction between being long and being short is brief but important:
- be long a stock means you own it and will profit if the stock goes up.
- be short a stock means you have a negative position in the stock and will profit if the stock goes down.
Going long on a stock is simple: you buy shares of the company and you go long. Sometimes people refer to a company’s shareholders as “longs”. But the important point to remember is that if you go long, you own the investment in question.
Going short on a stock is less straightforward, but it refers to investors who sell short a stock in order to profit from its decline. Investors refer to those in such a position as “shorts”. The key thing to remember here is that when you sell something, you have a negative position on it. The following section explains short selling and how it works in more detail.
This distinction can get a little more confusing when you go for long puts, which profit when a stock goes down.
How short selling works
Going short, or selling short, is a way to make a profit when a stock drops in price. While going long involves buying a stock and selling it later, going short reverses this order of events. A short seller borrows shares from a broker and resells them in the market. Later, the investor expects to buy back the stock at a lower price, pocketing the difference between the selling and buying prices.
In other words, while longs try to buy low and sell high, shorts try to sell high and buy low.
To short a stock, you will need a margin account, which allows you to borrow money based on the equity you have in the account. And because you are borrowing, you will have to pay interest on the loan. In addition, you will have to pay a (usually) small fee of a few percent per year to the broker, called “the cost of borrowing”. These fees allow the broker to find and arrange the loanable stock. Finally, if you are short, you will owe all dividends paid by the company.
Because of all these difficulties with short selling, it’s usually best to leave the pros at short selling.
Investors looking for an easier way to sell short often turn to options, and options offer a way to sell stocks short without the same risks and with magnified returns if the stock follows your path.
The pros and cons of going long and short
Although they may seem like opposite strategies, going long or short in a stock has asymmetrical benefits and risks.
Advantages and disadvantages of going long
- Gives you a stake in a business
- Can go up in value if the stock goes up, but can lose money if the stock price goes down
- Losses are limited to whatever you invest in the stock
- Must have the money to buy the long position, but can borrow on margin to buy it
- No ongoing costs to hold a share
- May receive cash dividends from a long position
Advantages and disadvantages of being short
- Does not give you a stake in the business
- Gives you a way to profit when a stock or market drops in value
- Losses are theoretically unlimited since a security can continue to rise
- Must have a margin account to be short
- Ongoing charges include interest expense on margin and the cost of borrowing a share
- Must pay all cash dividends paid by short stocks
At the end of the line
Once you know the lingo it is easy to understand what a long position and a short position are. And it’s a useful way for investors to quickly and succinctly say how they stand in a particular stock. Make sure you understand the potential risks of going long and short before you do anything.