Long Position vs. Short Position

by Mark Kennan

    Investing in the stock market helps you put your money to work for you, based on the performance of the companies you invest in. However, you're not limited to making money when the market goes up: your stock portfolio can hold both long positions for the companies you expect to do well and short positions for companies you think are going broke.

    Long positions refer to what most people think of when they think of investing: buying actual shares of a company. For example, if you think Company J is going to take off, you could buy 100 shares of Company J so that when the price does go up, you can sell your shares at a profit. There's no time limit on how long you can hold a long position.

    Short positions are what you use to make money when you expect the stock to go down. Instead of buying the shares, you borrow the shares from someone else and sell them, with the promise that you will replace the shares within a certain period of time. For example, if you think Company K's stock is going to drop, you could short sell 100 shares with the promise that you would replace them within three months.

    With a long position, you make money when the price of the stock goes up. For example, if you buy at $50 and it goes up to $60, you've made $10 per share. You also make money if the stock issues a dividend. On the other hand, short sales make money when the price of the stock goes down. For example, if you short sell a stock at $50 per share and it goes down to $40, you've made $10 per share because you earned $50 per share from selling it and only had to pay $40 per share to repurchase it.

    Of course, investments don't always work out as you expect. With a long position, the most you can lose is your investment. For example, if you pay $50 per share and the stock goes bankrupt, you lose your $50 per share investment, but nothing more. With a short position, your loses aren't limited because there's no limit on how high the price of the stock could go. For example, if you short sell shares at $50 per share and the price goes up to $200 per share when you have to repurchase them, you're out $150 per share. Plus, if the stock you short sold pays a dividend before you buy the new shares, you also owe the dividend payment.

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    About the Author

    Mark Kennan is a freelance writer specializing in finance-related articles. He has worked as a sports editor for "Ring-Tum Phi" and published articles on a number of online outlets. Kennan holds a Bachelor of Arts in history and politics from Washington and Lee University.

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