What’s the difference between a short and a long position?

Most people when they start investing will automatically take a long position, usually by purchasing a stock. However this is not the only option that you have, you can also take a short position. It is a good idea to learn about the differences between a long and short position and the advantages and disadvantages that they both offer.

A long position when you are investing is fairly easy to understand, this is what happens when you buy a stock. In this case you believe that prices are going to go up and so you have bought the stock or other asset and you then simply wait for it to go up. The advantage of taking a long position is that over time the market does tend to go up, at least the stock market does. Therefore it is reasonable to hold the stock for an extended period of time.

The other option that you have is to take a short position. In this case you are betting that the prices will go down. When it comes to the stock market this is a somewhat riskier position because of the fact that the market does tend to go up. The risk is exacerbated by the fact that there is a time limit on how long you can hold a short position. When you go short you are actually selling a stock that you don't own, you borrow it from your broker. You are banking on the price of the stock going down so that you can buy it a lower price than you sold it and deliver it to your broker to replace the stock that you borrowed.

While going short is generally considered more risky in the stock market there are times when it does make sense to use it. Obviously if you are expecting a major downturn in the market it might be a good idea. There are a lot of people who make their investment decisions by doing the opposite of what everybody else is doing. Therefore if t he market runs up rapidly it might make sense to go short.

One other thing to keep in mind about going short is that it is only more a risk in the stock market, things are very different when you are trading currencies or commodities. In these cases the market is a zero sum game so for every trade there has to be somebody who takes a short position for everybody who takes a long position. In this case the risks are exactly the same in either case. This is because trades in these markets are limited in duration no matter which side you choose, there is also no bias in the market preferring one direction over the other like there is for the stock market.