In stock market terminology, a long and short position means buying and selling the assets respectively. Investors can make profits by buying low and selling at higher prices, that is holding the investments for long positions. Contrary to common concepts, investors can make profits when the price of an asset falls, it is called short selling.
A long position in terms of stocks is the most conventional type of trading strategy. However, the long positions in Options and Futures are complicated than stocks.
What is a Long Position on Stocks?
The stock market tends to rise in capitalization over time. Even if an individual stock does not perform outstandingly, it appreciates over time to reflect the inflation effects. Investors look to buy now at any market price and sell later when prices inflate over time. It is the most basic form of holding a long position.
Investors holding stocks for the long term usually look for profits with capital realization. During the investment holding, a stock may fluctuate in price several times. The conventional form of investment will be to close the position at favorable prices.
A key difference in long and short trading is the initial investment requirement. Traders use the leverage of margin accounts by short selling stocks, their initial investments are lower. A long position requires buying stocks upfront. The investor has to pay the stock price and broker commission to open a long position.
Investors create a portfolio of investments to diversify the risks. They can hold multiple stocks in different industries all containing long positions. It means the investor’s portfolio is held for selling at a later date to realize profits. A risk-averse strategy is to create a mix of stocks having both long and short positions.
Long Position in Other Securities
Long position on stocks and bonds are relatively straightforward. However, in Futures and Options, the long position can take different forms.
An investor with a long position in Options can hold a put or call Option. The investor will make profits if the underlying asset appreciates. The call Option will rise in the price and the investor can exercise the right to buy the Option at a higher price.
A put Option earns profits when the underlying asset drops in the price. An investor holding a Long Put Option will make a profit if the asset dips in price. The investor will have the option to sell the option at a lower price.
A long position in Futures contracts works similarly as in Options. The key difference is that Futures set an obligation to execute the trade at a fixed future date and price.
How does Long Position on Stocks Work?
Long trading is the conventional way of making profits in stock markets. The investors buy shares or securities on cash accounts and sell them at a higher price later.
A key difference for investors in long positions is that they own the securities rather than borrowed. They can choose to sell the shares if the prices move up, or retain and wait for a later time. An investor may also purchase more stocks of the same company if the price fall in the company stocks is likely to arise in the future.
Buying and holding stocks as a long position looks simple, but it requires careful investment strategy. Buying stocks at favorable prices and closing the position at the right prices requires in-depth market analysis.
Here are some key points to consider for making profits in long trading.
Decide between investing and trading
Without clear objectives, no investor can make profits. Trading is a short-term strategy to buy and sell at favorable prices. Investing is a long-term strategy. Investors may look for regular long-term income through dividends or large capital gains through asset price appreciation.
Long positions can be used for both trading and investing. A long position would require a cash account balance to buy the underlying assets or stocks. Defining clear objectives with a long position will help you yield better profits.
You can’t randomly pick stocks to invest in. Investors appraise several stocks through fundamental analysis and technical analysis before buying stocks. You gain profits with a long position if the stocks inflate in price. The usual share price appreciation comes from high-performance indicators of the company such as larger sales, revenues, a new patent, etc.
Setting the timing right
Once investors lock in a long position, they must close the position at the right time to yield profits. Buying stocks i.e. opening a long position is equally important as closing the long position.
Investors must diversify their investments with diversification. Although investors have the option of buy and hold, for as long as the share prices become favorable, there are no guarantees a share will reach a favorable price in the future.
Advantages of Long Position on Stocks
Short-selling is high risk and high-profit trading strategy. It lures investors for high profits, but it involves complexities of technical knowledge. Most of the investors prefer trading with long positions. It is like going with the stock market trends.
Some key advantages of long positions over Short-Selling can be listed as:
- It does not require extensive knowledge of stock market complexities.
- Investors can take a long position with a cash account and own the stocks straight away.
- Investors hold the choice of choosing dividend or growth stocks.
- Profit maximization has no upper limits with a long position.
- Investors can lose as much they invest, unlike short-selling where losses can reach indefinite levels.
- Long positions do not incur additional costs such as margin interests.
- Investors do not have to close the long position with a cash account and can hold the investment as long as the stocks reach favorable prices.
- It can be used for diversification and hedging against investment risks.
Disadvantages of Long Position on Stocks
Most common investors like Long positions for simplicity. A long position usually utilizes a cash account and offers lower risks. However, a long position does offer some limitations as well.
- Long positions require substantial initial investments as brokers charge high interests on margin accounts.
- Investors may not yield profits by the time they expect to close the position.
- A long position is an expensive trading strategy for day traders and speculators.
Long positions are conventional buying of stocks with a cash investment. Traders and investors look for stock price appreciations to make profits with long positions. A trader with a cash account does not hold any obligation to close a long position. It resembles the conventional stock market trading strategies.