Long position vs. short position: What’s the difference in stock trading?
Investors and traders often talk about “being long” or “going long” a stock, or they may say they’re “short” a stock or other investment. The lingo may be opaque, but the difference between these two terms couldn’t be more different, and it’s useful to know the distinction.
Want to know the difference between the two? Here’s the long and the short of it!
Going long vs. going short
The distinction between going long and going short is brief but important:
- Being long a stock means that you own it and will profit if the stock rises.
- Being short a stock means that you have a negative position in the stock and will profit if the stock falls.
Being long a stock is straightforward: You purchase shares in the company and you’re long. Sometimes people refer to shareholders in a company as “longs.” But the important point to remember is that if you’re long, you own the investment in question.
Being short a stock is less straightforward, but it refers to those investors who short sell a stock in order to profit on its decline. Investors refer to those with such a position as “shorts.” The key thing to remember here is that when you’re short something, you have a negative position in it. The next section explains more about short selling and how it works.
This distinction can become a bit more confusing when you go long put options, which profit when a stock declines.
How short selling works
Going short, or short selling, is a way to profit when a stock declines in price. While going long involves buying a stock and then selling later, going short reverses this order of events. A short seller borrows stock from a broker and sells that into the market. Later the investor expects to repurchase the stock at a lower price, pocketing the difference between the sell and buy prices.
That is, while longs try to buy low and sell high, shorts try to sell high and buy low.
To short a stock, you’ll need a margin account, which allows you to borrow money based on the equity you have in the account. And because you’re borrowing, you’ll have to pay interest on the loan. In addition, you’ll have to pay a (usually) small fee of a few percent annually to the broker that is called “the cost of borrow.” This fee pays for the broker to find and arrange the loanable stock. Finally, if you go short, you’ll owe any dividends that are paid by the company.
Because of all these difficulties in going short, short selling is usually best left to the pros.
Investors who are looking for an easier way to go short often turn to options, and options offer a way to short stock without the same risks and with magnified returns if the stock goes your way.
The pros and cons of going long and short
While they may sound like opposite strategies, taking a long or short position in a stock has some asymmetric payoffs and risks.
Pros and cons of going long
- Gives you an ownership stake in a business
- Can increase in value if the stock rises, but can lose money if the stock falls in price
- 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 fees to own a stock
- Can receive cash dividends from a long position
Pros and cons of going short
- Doesn’t give you an ownership stake in the business
- Gives you a way to profit when a stock or market declines in value
- Losses are theoretically unlimited since a stock can keep rising
- Must have a margin account to go short
- Ongoing fees include margin interest expense and a stock’s cost of borrow
- Must pay any cash dividends paid by the short stock
Bottom line
Once you know the jargon, it’s easy to understand what a long and short position are. And it’s a useful way for investors to quickly and succinctly say how they’re positioned in a given stock. Be sure to understand the potential risks of going long and short before you make any moves.
