Understanding basic trading terminology is paramount to your success over the long term. Below, we’ve run through two vital concepts that you need to be familiar with.
What Does a Long Position and a Short Position Mean?
Long Position
When a trader has taken long positions, then it simply means that the person has bought the underlying stocks. For instance, if you have purchased 50 AAPL (Apple Inc) shares, then you are long 50 shares. You are the rightful owner of these shares as you have bought them in full. (1)U.S. Securities and Exchange Commission."Trading Basics: Understanding the Different Ways to Buy and Sell Stock"
Short Position
If a trader takes a short position, then it means that the individual owes the stocks to another person. The trader is short a specific number of shares. The trader does not own the shares but must ensure that, at the settlement date, that he/she is able to meet the obligation of buying the shares. (2)U.S. Securities and Exchange Commission."Trading Basics: Understanding the Different Ways to Buy and Sell Stock"
Why would someone do this? It’s possible to purchase shares from an online trading platform with margin in order to meet the obligation and deliver the shares. Then, with the idea that the share price will drop, the trader can then pay back the online trading platform or broker at a reduced share price, and in doing so, turn a profit.
There is a lot of risk associated with shorting stocks. If the price increases instead of falls, then a margin call will be issued by the trading platform. This means that the value of a trader’s account has dropped below the minimum margin value and must receive additional funding to prop up the overall account value.
Contrasting Factors
If an options contract is utilized, then the concept of long and short positions take on different meanings. Buying a call option (also known as a put option) is a long position while selling a call option (also known as writing) means the trader has taken a short position. (3)U.S. Securities and Exchange Commission."Trading Basics: Understanding the Different Ways to Buy and Sell Stock"
- Buying a call option: Trader now has the right to purchase or sell the underlying asset at a given price.
- Selling a call option: Writer now must fulfill the order by selling or buying the shares.
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