Explain about the long position and short position

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In trading investors can take long positions and short positions, they can buy an asset or sell an asset. Long and short positions are further complicated into call and put. An investor can take any of the above positions, meaning they may enter in long put, long call, short put or short call.

In terms of hedging strategies or complex trading an investor can combine any positions. In simple terms, a long position means buying a securities/stock/currency/commodity with expectation to make profit in future. Similarly, a short position means investors can sell their securities/commodity with intention to buy again at a lower rate.

How to determine position?

Position is determined based on assets owned by the person. When a person owns or paid to own the security/asset. Main benefit of holding a long position is to earn more money when asset price increases by selling it at a higher price.

It gives more profits to investors. In short position he will sell the asset when asset price falls. In this position investors will sell their asset at a higher price and wait till price to fall to buy or repurchase them.

Long position

In this, investors will hope for a price to rise. There will be potential loss or downside of purchase price in long asset purchase.

In a long call position, an investor purchases a call option and gets benefits in the price rise of the underlying asset. In a long put position, the long put prices will go down for an underlying asset. In long puts and calls, potential downsides are complicated.

Example

Let’s say Mr. A decided to buy 1500 shares of a company. By his knowledge he predicted the company has strong growth in future. He buys the share at Rs.50 per share

Investment at present rate ⇒ 1500*50 ⇒ Rs.75000/-

After 12 months, company share price increase to Rs.73 per share (Rs.3/- increase)

Investment at share price Rs.73/- ⇒ 1500*73 ⇒ Rs. 109500/-

Now investor gains Rs.34500/- by holding the long position

Short position

In this position, investors will look for a price drop in stock price. In this, stockbrokers buy some shares of a chosen company and sell at present market price. Investor has an open position with a broker that has closed in the future. If any price drops, an investor can purchase shares for fewer prices than sold for earlier.

The difference between those prices decides whether there is loss or profit. It requires trust between investors and brokers. Short positions in other assets are executed through the derivatives called “swaps”.

Example

Mr. X places an order to buy 1000 shares with a current price of Rs.30 with the broker. Broker complicated all formalities on behalf of Mr. X and credited to the investor’s margin account with margin deposit (say 50%). Investor margin account will be = 30000+15000 ⇒ 45000. In few weeks the share price may decrease to Rs.25 (1000*25 = 25000). From these investors will sell his shares and gain Rs.5000 (30000-25000 = 5000).

Here, broker commission and other charges are not considered.

raja
Updated on 06-Jul-2021 11:03:05

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