Long and Short (Trading Term Definitions)

What long and short mean, along with examples

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Trading Term Definition: Long and Short

The terms long and short refer to whether a trade was entered by buying first, or selling first. A long trade is initiated by buying, with the expectation to sell at a higher price in the future and realize a profit. A short trade is initiated by selling first (before buying), with the expectation to buy the stock back at a lower price and realize a profit.  

Breaking Down "Long"

When a day trader is in a long trade, they bought an asset, and are hoping that the price will go up.

Day traders will often use the terms "buy" and "long" interchangeably. Similarly, some trading software will have a trade entry button marked "Buy", where another might have a trade entry button marked "Long".

The term long is often used to describe an open position, as in "l am long Apple", which indicates the trader currently owns shares of Apple Inc. (AAPL). The letters inside the brackets are called a stock ticker symbol.

Traders will often say I am "Going long..." or "Go long" to indicate their interest in buying a particular asset.

In the stock market, stocks are typically traded in in 100 shares lots. So if you go long 1000 shares of XYZX stock at $10, the transaction costs you $10,000. If you are able to sell the shares at $10.20, you will receive $10,200, and net a $200 profit (less commissions).

This type of scenario is preferred when going long. The alternative is that the stock drops. If you sell your shares at $9.90, you receive $9,900 back on your $10,000 trade. You lose $100 (plus commission costs).

When you go long, your profit potential is unlimited, since the price of the asset can rise indefinitely.

If you buy 100 shares of stock at $1, that stock could go to $2, $5, $50, $100 etc (although day traders typically trade for much smaller moves). Your risk is limited to the stock going to zero. In the example above, the largest loss possible is if the share price goes to $0, resulting in a $1 loss per share. Day traders keep risk and profits well controlled, typically exacting profits from small moves over and again. 

Breaking Down "Short"

When a day trader is in a short trade, they sold an asset (before buying it), and are hoping that the price will go down. They realize a profit if the price they buy it for is lower than the price they sold it at. "Shorting" is confusing to most new traders, since in the real world we typically have to buy something in order to sell it. In the financial markets you can buy and then sell, or sell then buy. 

Day traders will often use the terms "sell" and "short" interchangeably. Similarly, some trading software will have a trade entry button marked "Sell", where another might have a trade entry button marked "Short".

The term short is often used to describe an open position, as in "I am short SPY", which indicates the trader currently has a short position in S&P 500 (SPY) ETF.

Traders will often say I am "Going short..." or "Go short..." to indicate their interest in shorting a particular asset.

In the stock market, stocks are typically traded in 100 shares lots. So if you go short 1000 shares of XYZX stock at $10, you receive $10,000 into your account. This isn't your money yet though. Your account will show that you have -1000 shares (minus). At some point you must bring that balance back to zero, by buying 1000 shares. Until you do so, you do not know what your profit or loss on your position is.

If you are able to buy the shares at $9.60, you will pay $9,600 for the 1000 shares, but you originally received $10,000 when you first went short. Your profit is therefore $400, less commissions. If the stock price rises though, and you buy the shares back at $10.20, you pay $10,200 for those 1000 shares, and you lose $200 (plus commissions).

When you go short, your profit is limited to the amount you initially received on the sale. For example, if you sell 100 shares are $5 your max profit is $500, if the stock goes to a price of $0. Your risk is (theoretically) unlimited though, since the price could rise to $10 or $50, or more. The latter scenario means you need to pay $5000 to buy back the shares, losing $4500. Since risk management is used on all trades, this scenario isn't typically a concern for day traders that take short positions.

Shorting (or selling short) allows professional traders to profit regardless of whether the market is moving up or down, which is why professional traders usually only care that the market is moving, not which direction it is moving.

Shorting Various Markets

Traders can go short in most financial markets. In the futures and forex markets a trader can always go short. Most stocks are shortable in the stock market as well, but not all of them. In order to go short in the stock market your broker must borrow the shares from someone who owns the shares (you don't see any of this happen, or need to worry about it). If the broker can't borrow the shares for you, they won't let you short the stock. Stocks that just started trading on the exchange (called Initial Public Offering stocks, or IPOs) also aren't shortable. 

Rising prices and going long, and falling prices and going short, are also sometimes referred to as being bullish or bearish.

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