If you’re a new investor, you may not be aware of many of the terms used in the stock market. However, you need to get to know the meaning behind such terms before you get started with investing. This way, you can make better and more informed decisions. In this article, we’re going to take up two basic terms that are frequently used in the stock market - long position and short position and analyse them in detail.
As an investor, you can take two positions in a stock - a long position and a short position. Both these positions are contrary to one another. The decision on whether to take a long position or a short position is primarily based on the current market trend.
The long position is the most common position that most investors, especially beginner investors, tend to take in the stock market. It is less risky compared to a short position, which is usually preferred by experienced traders.
A long position is when an investor purchases the stock of a company and holds onto it. Investors usually enter a long position in the hopes of holding onto the stock till its price rises. And once the price of the stock does rise, the investors liquidate or square off their long position by selling the stock. The difference between the purchase price and the selling price is the profit.
Here’s an example to help you understand this concept in a better manner.
The shares of Reliance Industries Limited are trading at ₹2,500 per equity share. Since you feel that the price is likely to rise shortly, you purchase 10 equity shares of Reliance Industries at ₹2,500 per share. The shares that you purchased are delivered to your demat account after T+1 days.
By owning 10 shares, you’ve entered a long position in Reliance Industries. Till the time you hold these shares, you will continue to be in this long position. When you finally sell the 10 shares that you own, you’re said to have exited the long position.
After a few weeks, the share price of Reliance Industries rises to ₹2,600 per share as per your expectations. At this point, you decide to book profits by selling all your 10 shares for ₹2,600 per share. Selling these shares will liquidate your long position and you will end up with a profit of ₹100 per share (₹2,600 - ₹2,500).
A short position is when an investor sells the stock of a company without actually owning it. The investor then exits or liquidates the short position by buying the same quantity of the company’s stock that they sold at a lower price. The difference between the price at which the stock was sold and the price at which it was bought back would be the profit.
Let’s take up an example to better understand the concept of a short position.
The shares of Infosys Limited are trading at ₹1,400 per equity share. You feel that the price is about to go down soon. To use the negative movement of the share price to your advantage, you enter into a short position by selling 10 shares of Infosys at ₹1,400 per share. Remember, you don’t actually own the stock of Infosys but you’ve still sold 10 shares of the company.
After a few hours, the price goes down to ₹1,350 per equity share as you expected. At this point, you wish to exit or liquidate the short position. What do you do? You simply buy 10 shares of Infosys at ₹1,350 per share. This will automatically square off your short position and you get a profit of ₹50 per share (₹1,400 - ₹1,350).
Investors generally tend to go long on a stock when they expect its price to rise shortly. On the contrary, investors opt to short a stock when they expect its price to fall in the future.
So, before you take either of these two positions, take the current market trend into account. If you find that the market is going up, consider taking a long position. If the market is going down, however, you can consider taking a short position.
If you’re an investor who is new to the stock market, restricting yourself to long positions in the stock market may just be the right course of action. Once you’ve gained enough experience, you can gradually start taking up short positions on stocks.
Speaking of long and short positions, trading in the stock market requires you to have a demat account. You can open a demat account and a trading account by visiting the website of Motilal Oswal. The account opening process is so simple, quick and hassle-free that all it takes is just a few minutes of your time to complete.