Economics Investing

Types of Stock Transactions for Dummies: Long and Short Positions

So, you are a beginner-trader, you want to start your successful trading career, but you still do not understand some terminology? Or, better to say, slang. For example, what do traders who are shouting “Put Long” or “Close Short” mean? Today we will try to help you to feel more confident and answer at least this question.

One of the primary methods of stock exchange transactions classification is the direction of the open position. In general, there are two main directions – purchase and selling.

Let’s consider the first direction of the deal – purchase.

Purchase equity markets also represent the terms Long, Long Position, Bullish Position, the deal on the increase, and traders and investors who opened a similar market position, called Longists, Bulls or promotion players (growth players).

The purchase of an asset is referred to as a “Long Position” or “Long” because equities in stock markets, especially in the early stages of the formation of exchange, have been bought for long-term investment, as most instruments have grown steadily. Also, a Long position indicates the fact that the action can grow very long and far up in the tender, but fall only to zero.

Implementing a purchasing deal, the trader expects the growth of the asset, i.e., plans to buy at a lower price to close a position with a higher price of the asset in the future.
For position closing (liquidation of Long Positions) the trader sells a similar number of financial instruments.

Let’s view an example.

At the current moment of time, shares of Tesla stand 375 USD apiece. Let’s imagine, that some experts predict, that the price should soon grow and you believe their prediction. You decide to purchase 100 shares at the current price. The experts forecast turns out to be true. A few days later, the shares are traded at the price of 390 USD apiece. You close your Long Position and get a profit.

(390 USD/per share – 375 USD/per share)*100 shares = 1500 USD Profit

The second type of transactions by direction is selling.
The Sale on the stock markets is denoted by the terms Short Position, Short, Short Trade, Bear Position, position on the decline, and players engaged in transactions in this direction are called Shortists, Bears or players for a fall (players to fall).

Sale tranctions are called “Short” or “Short Deals”, because large investors (especially in the early stages of the origin of exchange trading) seldom carried out sales operations since most of the assets more often grew in value than they fell. Also, as you know, the price can drop only to zero, but there are no obstacles in growth.

When executing a deal for sale, the trader believes that the current price of the instrument is overstated for some reason. Proceeding from this, he plans to make a sale at a high price, and later buy back his assets at a lower price and get a difference in the form of profit. To close the deal for sale, Shortists buy a similar number of financial instruments.

Let’s view an example.

Yesterday, shares of UAL were 58.65 USD apiece. Now they are trading around $57.79. Let’s imagine, that some experts predicted that decline and you decide to sell 1000 shares at the yesterday price. Today, you liquidate your Short Position, at the expense of which you make a profit.

(58.65 USD/per share – 57.79 USD/per share)*1000 shares = 860 USD Profit

Many newcomers find it difficult to understand the principle of Sale Transactions since a quite natural question arises – how can a trader sell shares without having them available?

In fact, this exchange transaction became possible because the broker provides a conditional loan to the trader in the form of shares that he can sell. After the liquidation of the transaction, the trader returns the loan with the redemption of his Short Position and keeps the difference in the operation. If the difference is negative, i.e. the trader has liquidated the transaction at a price that is higher than the price of the first sale, then, accordingly, the loss is fixed.

Beginners should not be too hung up on the mechanism for the implementation of transactions for sale since there is almost no difference between the Purchase and the Selling Transactions. Both require, above all, mindfulness and understanding of the direction correctness.