Traders use a long position when they anticipate a price increase

What is a long position?

Traders and investors often use a long position when they believe that prices will increase. As a result, they purchase assets and hold on to them. A long position is not applicable in stocks alone. We can also use this in other tradable assets such as commodities, forex, futures, and the like. 

Any trader must understand what a long position is and how it works. It is a significant element and strategy in the trading world since it is one of the most used traders’ strategies.

An example scenario with a long position

If a person uses a long position when trading with a currency, a stock, futures, or anything else, best believe they anticipate that these assets will increase in the future. They think that these purchased assets will give them profits.

Say, for example, X Company shares’ current sale is at $50. After researching and reading articles about X Company, Kara believes that the current market price will rise soon enough. As a result, she bought a total of 500 shares from X Company in a long position. If Kara was right about the increase of X Company’s shares, then she goes home with a profit.

Long position vs. short position

A long position is the exact opposite of a short position. In a long position, you believe that the price of an asset will go up. You gain profits by purchasing an asset in a long position and selling it at a higher price than what you initially paid.

On the other hand, a short position is thinking otherwise. You believe that the stocks will decline; as a result, you exploit them. Traders use this less compared to a long position since it is very tricky and risky. A trader should be knowledgeable and confident enough first before considering using a short position.

A short position is borrowing stocks of a company, say from an investment firm. You think that their stocks are overvalued. So, you sell this borrowed stock to another investor. The price declined as expected, so you returned the borrowed stocks by purchasing another set of stocks with a lower price than the price when you sold the borrowed stocks. The difference between the two is the profit that you gain. This strategy is unconventional and risky for new traders. If the price increased instead of the expected decline, the trader has more losses than gains.

In a long position, the risk is a price decrease. In a short position, the risk is a price increase. 

More on long positions

As we have mentioned, a long position is not applicable in stocks alone. We can also use it in other tradable assets. Another example is a long position in futures contracts to avoid price movements that go in a direction that you do not want. You agree to buy an asset in the future with today’s agreed price.

We also have a long position in options that somehow works the same as a futures contract. The only difference is that an option lets you choose to go in a short or long position. An investor can have more than one position in their portfolios. They can have a long position simultaneously with a short position if he wishes to diversify his portfolio.

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