A "long position" in trading refers to the purchase of an asset with the expectation that its value will increase over time. Traders who go long are bullish, meaning they believe the price of the asset will rise, allowing them to sell it later at a higher price for a profit. This is the more traditional form of investing.
Example:
You believe that Apple (AAPL) stock, currently trading at $180 per share, is undervalued and will increase in price due to new product releases. You buy 100 shares of AAPL at $180, investing $18,000.
If the price of AAPL rises to $200 per share, you can sell your 100 shares for $20,000, making a profit of $2,000 (excluding commissions).
If the price of AAPL falls to $160 per share, and you decide to sell, you would receive $16,000, incurring a loss of $2,000.
A "short position," or "short selling," is the opposite of a long position. It involves selling an asset that you don't own, with the expectation that its value will decrease. Traders who go short are bearish, meaning they believe the price of the asset will fall, allowing them to buy it back later at a lower price and profit from the difference. To short an asset, you typically borrow it from a broker and sell it in the market. You then buy it back later to return to the broker.
Example:
You believe that Tesla (TSLA) stock, currently trading at $250 per share, is overvalued and its price will decline. You borrow 50 shares of TSLA from your broker and immediately sell them in the market for $250 per share, receiving $12,500.
If the price of TSLA falls to $220 per share, you can buy back 50 shares for $11,000 to return to your broker. Your profit would be $1,500 ($12,500 - $11,000), excluding borrowing fees and commissions.
If the price of TSLA rises to $280 per share, and your broker demands the shares back (or you decide to cover your position), you would have to buy back 50 shares for $14,000. This would result in a loss of $1,500 ($12,500 - $14,000). Short selling carries theoretically unlimited risk because there's no cap on how high a stock's price can go.