Investors and traders often talk about being “long” or “going long” on a stock, or they may say that they are “short” on a stock or other investment. The jargon may be opaque, but the difference between these two terms couldn’t be more stark, and it’s helpful to know the distinction.
Do you want to know the difference between the two? Here’s the long and the short of it!
Going long versus going short
The distinction between going long and going short is short but important:
- Be tall a stock means you own it and you profit if the stock rises.
- Be short a stock means that you have a negative position in the stock and profit if the stock falls.
Being long a stock is simple: you buy shares in the company and you are long. Sometimes people call shareholders in a company “longs.” But the key point to remember is that if you are long, you own the investment in question.
Shorting a stock is less simple, but it refers to investors selling short a stock to profit from its decline. Investors call those with such a position ‘shorts’. The most important thing to remember is that when you lack something, you have a negative position about it. The next section explains more about short selling and how it works.
This distinction can become a bit more confusing if you use long put options, which profit when a stock falls.
How short selling works
Short selling, or short selling, is a way to make a profit when a stock falls in price. While going long involves buying a stock and later selling it, going short reverses this sequence of events. A short seller borrows shares from a broker and sells them on the market. Later, the investor expects to buy back the shares at a lower price, pocketing the difference between the selling and purchasing prices.
That is, while longs try to buy low and sell high, shorts try to sell high and buy low.
If you want to short a stock, you need a margin account, which allows you to borrow money based on the equity you have in the account. And because you borrow, you have to pay interest on the loan. In addition, you have to pay the broker a (usually) small fee of a few percent per year, which is called ‘the loan costs’. This fee pays the broker to find and arrange the loanable shares. Finally, if you go short, you will owe any dividends paid by the company.
Because of all these difficulties of short selling, short selling is usually best left to the professionals.
Investors looking for an easier way to short often turn to options, and options offer a way to short stocks without the same risks and with greater returns if the stock moves 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 comes with some asymmetrical payoffs and risks.
Pros and cons of going long
- Gives you an ownership interest in a company
- May increase in value if the stock rises, but may 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 costs for owning shares
- Can receive cash dividends from a long position
Advantages and disadvantages of short selling
- Does not give you an ownership interest in the company
- Gives you a way to make a profit when a stock or market falls in value
- Losses are theoretically unlimited since a stock can continue to rise
- To go short, you must have a margin account
- Ongoing fees include margin interest costs and the cost of borrowing a share
- Must pay all cash dividends paid by the short stock
In short
Once you know the jargon, it’s easy to understand what a long and short position are. And it is a useful way for investors to quickly and concisely say how they feel about a particular stock. Make sure you understand the potential risks of long and short before making any moves.