What does it mean to take a long position? Learn how this investment strategy works and how investors use it to profit.
There are many ways for investors to profit, but one of the most common methods is to take what is known as a “long position.”
Taking a long position essentially means buying a security, such as a stock, with the expectation that it will rise in value. For example, a trader who is bullish on a company might go long on that company with the hope that its stock price will eventually go up.
Read on for a brief overview of how taking a long position works and how traders can make money by using this investment strategy to buy and sell shares on the stock market.
Taking a long position
When an investor takes a long position in a stock, the idea is that they will buy shares at a low price and then they will sell the shares at a higher price. In this investment strategy, an investor who owns 100 shares of a company is said to be long 100 shares.
After taking a long position in a company, an investor would hold the shares and sell them once the stock price has risen. If the company’s stock price drops, but the investor remains optimistic that it will rise again in the future, they might choose to buy more shares at a lower price.
Investors who hold long positions in stocks may also be eligible to receive dividends from the companies they have invested in. A dividend is typically paid to shareholders quarterly.
The difference between long and short positions
While many investors choose to go long on stocks, it’s also possible to short a stock. Short selling a stock is a type of investment strategy that is considered the opposite of taking a long position. To take a short position, an investor would borrow funds from a broker and bet that a company’s shares will go down.
Sooner or later, the investor must “close” the short position by buying back the same number of shares and returning them to the broker. Bearish investors can make a profit if the company’s shares decline, but if the company’s shares increase in price, the short seller will owe that money to the brokerage firm.
As Investopedia notes, the basic difference between these two investing methods is that long positions are those that are owned, while short positions are those that are owed. A simple long stock position is bullish and anticipates growth, while a short stock position is bearish.
Theoretically, a short sale has a higher risk than taking a long position, as it involves using borrowed money to trade a stock or another asset that could increase in price. Taking a long position also has risks, but they are defined — when going long on a stock, investors can only lose their premium.
This is an updated version of an article first published by the Investing News Network in 2017.
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Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.