What is a long position?
Looking for a long position definition? Investors take a long position in the stock market when they buy stocks and hold on to them, believing prices will increase. Going long indicates you’re bullish about an asset’s future.
Where have you heard about long positions?
‘Long’ or ‘long position’ is an essential part of investment language. Going long on a stock or bond is what most investors do in the capital markets as it simply means buying a stock, and those new to the investment scene are most likely to adopt a long-term strategy. Many people think of long positions as being simply 'investment', but to market professionals it’s just one of a number of options.
As well as stocks, long positions can be taken in several asset classes, including commodities and currencies.
What you need to know about long positions...
Someone who has 'gone long' of Daimler shares, or the dollar, or Brent crude oil or anything else, is reasonably confident that the value of the asset concerned will be higher in the future than it is at the time of purchase, giving them a profit on the deal.
For example, if Marks & Spencer (MKS) shares are currently trading at 350p and you expect them to rise to 400p, you might decide to buy 1,000 shares of MKS. By doing this, you’re carrying out a long trade. If the stock does rise by 50p, you’ll make a profit of £500.
The upside of a long position is that there’s no limit to potential gains, and you can’t lose more than the initial value of the trade.
The long and short of it
When you’re trading assets, you can take one of two positions – long or short. As we’ve already discussed, if you think an asset’s value will go up, you take a long position. A long trade is initiated by buying. You make a profit if you sell for a higher price than you paid.
If you think an asset’s value will go down, you can take a short position, although this is a less conventional investment strategy. A short trade is initiated by selling first. By ‘going short’, you don’t own the stock outright, but borrow it from a broker with the expectation of selling it and then buying it again at a lower price. This is usually done over a relatively short timeframe, before the value of the investment is anticipated to begin declining.
There are also differences between long and short positions with regards to risk. For investors going long, the main risk involved is a fall in the value of the asset they own, resulting in a loss. The principal threat for those going short is a rise in the value of the shares they’ve borrowed. The investor must still repay the borrowed funds even if they didn’t make a profit.
That’s why short trades are considered considerably risker than long trades. With long positions, losses are limited because they can’t fall below zero, but with shorts the risk is infinite because there’s no upper limit to how high share prices can go.
Long positions in futures
A variation of a long trade can be to enter into a long futures contract to hedge against adverse price movements. You agree with someone to buy something in the future at a price agreed today. Businesses often enter into long futures contracts to offset the risk of volatility in commodities markets.
For example, suppose an airline expects the price of oil to rise in the coming months. It could agree to buy 1,000 barrels of oil in three months’ time at £55 per barrel from its fuel supplier, costing a total of £55,000. In three months, whether or not the price per barrel is above £55, the airline is obligated to purchase the oil from the supplier at the agreed price. In return, the supplier is expected to deliver the physical commodity when the contract expires.
Speculators and hedgers also trade in the commodity markets. Speculators will buy and sell futures in an effort to make a profit. If they think prices will rise, they’ll buy futures (a long position), but if they think prices will fall, they’ll sell futures (a short position). The volume of trades from speculators adds liquidity to the market.
In the options market, a trading agreement works in a similar way to a futures contract. Options offer you the right to take a long or short position, although you’re under no obligation to exercise that option. That’s what makes it different to a futures contract. As the name suggests, an options agreement reflects an option to buy or sell an asset at a predetermined price and date. You buy if the security has performed according to expectations, but you decline to purchase if the outcome isn’t what you hoped for. If you decide to buy the asset, you’re taking a long position in that options contract.
If you expect an asset’s price to rise, you’ll go long on a call option, but if you’re expecting a downward price movement, you can go long on a put option.
Suppose a call option has a £1.50 strike price and a 33p premium. If you’re bullish on the stock, you may decide to go long on one call option of 1,000 shares instead of buying the shares outright. The price paid to acquire the option is £330 (1,000 x 33p). At expiry, if the stock is trading above £1.50, you can exercise your right on your long option to purchase 1,000 shares at £1.50. If you were wrong in your assessment and the stock price fell below £1.50, your call option will expire worthless.
Combining long and short positions
It’s not uncommon for experienced investors to hold several different types of position at any one time, with their portfolio containing a combination of assets that are intended for holding over the long term, a futures option that may or may not be exercised at some point and short sale strategies that are designed to provide a return sooner rather than later.
Not only do many investors diversify the range of investments held within a portfolio but also the positions held. Investing is all about balancing reward and risk.
Once you get more confident with trading, you can expand your repertoire to include both long and short positions and asset types.
Find out more about long positions…
To discover more about the differences between long and short positions, check out this video. It explains in a nutshell what long and shorts are, and how they compare.
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