When you start trading in the stock market, you'll come across two terms very often: Long Position and Short Position. But what do they mean, and how are they different? Understanding these concepts is important because they guide your approach to making money in the market. Both strategies have their benefits, but they also come with risks. In this blog, we’ll explain long and short positions in simple terms and give you an easy comparison to help you make better trading decisions.
What is a Long Position?
A long position means that you buy a stock or an asset with the expectation that its price will go up in the future. You make money by selling the stock at a higher price than what you paid for it. It’s like buying something now and waiting for its value to increase.
Example: Let’s say you buy 100 shares of XYZ Ltd at ₹500 each. You believe that in the future, the price will go up, so you hold onto them. After a few months, the price of the stock rises to ₹600 per share. You sell your shares and make a profit of ₹100 per share, or ₹10,000 in total.
In a long position, you are hopeful that the price will go up.
What is a Short Position?
A short position is the opposite of a long position. In this case, you borrow shares of a stock that you don't own and sell them at the current price, hoping the price will fall. When the price drops, you buy back the shares at a lower price and return them to the lender. The difference between the selling price and the buying price is your profit. However, if the price goes up, you can face losses.
Example: Suppose XYZ Ltd is trading at ₹500 per share, and you think its price will fall. You borrow 100 shares and sell them for ₹500 each, getting ₹50,000. A few weeks later, the price drops to ₹400 per share. You buy back the 100 shares at ₹400 each, paying ₹40,000, and return them. Your profit is ₹10,000, the difference between what you sold the shares for and what you paid to buy them back.
In a short position, you are hoping that the price will go down.
Key Differences Between Long Position vs. Short Position
Here’s a comparison table highlighting the key differences between a long position and a short position:
Options: Long and Short with Examples
Both long and short positions can be applied in trading options as well. An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an asset at a specific price within a certain time frame.
- Long Position in Options: Buying a call option gives you the right to buy an asset at a certain price. If the price goes up, you profit by selling the option or exercising the contract.
Example: You buy a call option for XYZ Ltd at ₹500 with an expiration date in one month. The stock rises to ₹600. You exercise the option and buy the stock at ₹500, making a profit of ₹100 per share.
- Short Position in Options: Selling a put option means you are betting that the price will stay above a certain level. If the price falls, you may have to buy the stock at a higher price than the current market price.
Example: You sell a put option for XYZ Ltd at ₹500. If the stock stays above ₹500, you keep the premium you received. But if the stock falls below ₹500, you have to buy it at ₹500, even though it’s worth less.
Long Position Profits and Cons vs. Short Position Profits and Cons
Here’s a quick breakdown of the pros and cons of both long and short positions:
Further reads: What is the difference between Holdings and Positions?