What is Long and Short in Trading? | Pros and Cons | Difference | Example
Introduction
Today I’m going to introduce you to new terms related to the stock market. You might have indulged in such trading activities however you may be using different terms for the same concept. Let me make you familiar with What is Long and Short in Trading? With that, we will cover its Pros and Cons along with examples. Above all, we will discuss the difference in detail. Let’s begin!
What is Long and Short in Trading?
Short Definition: Short selling, also known as ‘selling’, is a term that describes the position you’ll take when you think that an asset’s price will fall.
Long Definition: Long selling is a term some people use to describe a long position, also known as ‘buying’. You’ll do this when you believe that the underlying asset’s price will rise.
Lets we understand with an example:
If an investor has purchased 500 shares of Company ABC, then he/she is said to be 100 shares long.
This recognizes that the investor paid the full amount for those shares.
Regardless, if the investor shares 100 shares of Company ABC without actually owning them, he/she is said to be 100 shares short.
This often happens when an investor borrows shares in his or her margin account from the brokerage firm in order to make the delivery. This investor now owes 100 shares and must purchase these shares in the market to make a delivery at the settlement.
Before doing Short and Long selling, Kindly understand this concept and related risk:
Pros and Cons
Short Trading
| Pros | Cons |
|---|---|
| The advantages of a trade can be realized in a short period via this method. You can make profits within a day by investing in intraday trading. | The unpredictability of the stock markets makes it challenging to figure out the future status of your capital. This, in turn, increases your tension levels. |
| If you discover that a wrong decision was taken on a trade, you can free up the capital invested and reinvest it in new stocks. This is because capital is at risk for a shorter period. | Short trading demands a lot of attention. You need to always check the market in order to make buying and selling decisions. |
Long Trading
| Pros | Cons |
|---|---|
| This trading helps you save taxes. Most short-term traders need to pay around 20%-30% whereas long-term trading activities are charged for only 5%-10%. | Long-term trading needs you to have an in-depth understanding of the sector or stock you are investing in. You just can’t make judgments based on certain news. |
| This trading also helps you take benefit of the power of compounding. You will be able to invest the dividends back in the market to earn more profit. | Long-term trading requires you to invest your capital for a long term, and you might miss out on volatility in the market to make money. |
Let’s check the difference between long and short-term
Long vs Short in Trading
Day traders can go long or short depending on their selection and how they expect the market to move; whether they expect a bearish or bullish trend.
There are always inherent risks involved in trading shares, for both buyer and seller.
If you go for a long position, then you can hold for as long as you want and wait for market positions to improve before making a sale. However, in case of a short trade, this option of waiting is not available. The trader needs to buy the shares even if they are at a higher price to square off the trade.
The Bottom Line
There are numerous long and short positions that traders can take. Before attempting to incorporate long and short positions into his or her trading strategy, a knowledgeable investor will have grasped the numerous advantages and disadvantages of each individual type of long and short position.
FAQs
Long selling is a term some people use to describe a long position, also known as ‘buying’. You’ll do this when you believe that the underlying asset’s price will rise.
Short selling, also known as ‘selling’, is a term that describes the position you’ll take when you think that an asset’s price will fall.