Day traders on the stock market have their own language. Youre learning, but some of the terms take time to understand and use correctly. If youre unsure about the terms long vs. short, youre not alone. Many new traders get confused by these two words.
You initiate a long trade when you buy an asset with the expectation to sell it at a higher price in the future and make a profit. A short trade is initiated by borrowing an asset to sell it, with the intent to repurchase it at a lower price, take a profit, and return the shares to the owner.
- In day trading, long and short trades refer to whether a trade was initiated with a purchase or a sale.
- In a long trade, you purchase an asset and wait to sell when the price goes up. Buy and long are used interchangeably.
- When youre in a short trade, you borrow an asset, sell it, and hope to buy it back when the price goes down. Sell and short are used interchangeably.
|Long Trade||Short Trade|
|Entry Action||You buy the asset||You borrow an asset and sell it|
|Wait||You hold the asset to sell higher than the purchase price||You wait for a lower price on the asset|
|Exit Action||You sell the asset and make a profit||You buy the asset back at a lower price, make a profit, and give it back to the lender|
Similarly, some trading software has a trade entry button marked buy, while others have buttons marked long. The term often describes an open position. l am long Apple indicates you own shares of Apple Inc. and want to sell them at a higher price.
You might hear a trader say they are going long or go long to indicate interest in buying a particular asset. If you go long on (buy) 1,000 shares of XYZ stock at $10, the transaction costs you $10,000. If you can sell them at $10.20 per share, you receive $10,200. You get a nice profit of $200 before commissions. This is what youre hoping for by going long.
When you go long, your profit potential is unlimited. This means that the price of the asset could rise indefinitely.
If you buy 100 shares of stock at $1, that stocks price could jump to $2, $5, $50, or $100; however, day traders typically trade on much smaller price moves. Youll be more likely to see long positions measured in cents rather than dollars.
The flip side to an increase in price is a decrease. If you sell your shares at $9.90, you receive $9,900 back on your $10,000 trade. Youd lose $100 and have to pay commission fees on top of it.
The largest loss possible you could experience in this example is if the share price dropped to $0, resulting in a $10 loss per share. Day traders work to keep risk and profits under tight control using options called a stop loss, a long call, and a long put. These options let you profit from multiple small moves and avoid large price drops.
You buy a long call to have the right to buy a stock (make another trader sell it to you) at a specific price; you buy a long put to have the right to sell the stock (make another trader buy it from you) at a specific price. The stop loss is an order placed to keep from losing too much on a trade if the price moves against you.
Shorting a stock is confusing to most new traders. In the real world, you have to own something to sell it. You can enter short trades (sell assets before buying them) in the hopes that the price will go down so that you can sell it to another trader.
Youll hear traders use the terms sell and short to refer to the same action. Some trading software has a trade entry button marked sell, while others have one labeled short. You use the term short to describe an open position, as in, I am short SPY, indicating that you have borrowed (usually from your broker) S&P 500 (SPY) ETF and are ready to sell.
When you short a stock, your profit potential is limited to the amount you paid, but the risk becomes unlimited because the price could rise indefinitely.
Similar to the example of going long, if you go short on 1,000 shares of XYZ stock at $10, you receive $10,000 into your account, but this isnt your money yet. Your account will show that you have negative 1,000 shares, which will need to be replaced. Note that youre short 1,000 shares, not $10,000.
If you repurchase the shares at $9.60 per share, you will pay $9,600 for the 1,000 shares. You received $10,000 when you sold them (went short), so you make $400 before commission fees. If the stock price rises and you rebuy the shares at $10.20, you will pay $10,200 for those 1,000 shares. Here, youve lost $200 and still need to pay broker fees.
You can buy options to help you mitigate losses when youre short. The stop loss is the same, but these options are used when youre shortâ€”a stop loss, a short call, and a short put.
You buy a short call to have the right to sell a stock (make another trader buy it) at a specific price; you buy a short put to have the right to repurchase a stock (make another trader sell it to you) at a specific price. The stop loss prevents you from losing too much on a trade if the price moves against you.
Shorting, or selling short, allows you to profit if the market is moving up or down. You can sell and buy throughout the day on price movements, which is why many traders only care that the prices are moving, not which direction they are moving.
Special Considerations for Shorting
Shorting stocks is popular with professional traders. While it is a good tactic for making a profit, it tends to drive stock prices to drop too quickly when done on a large scale. In 2010, the Securities and Exchange Commission (SEC) imposed the alternative uptick rule, which restricts short selling from further driving down the price of a stock that has dropped 10% or more in one day from its previous closing price.
The SEC has also issued warnings about shorting stocks (or even just buying and selling them) based on what you may hear on social media, news outlets, or websites to keep you and other retail investors from being used to manipulate the market.
If a stocks price drops 10%, short sales become limited in that they can only occur if the price of the stock being shorted is above the current national best bid, or the highest price a buyer is willing to pay nationally.
When Do I Use a Long or Short Trade?
You would go long or use a long trade on a stock that you believe or know will rise in price. A long trade to a day trader is at most one trading day. If you find an opportunity to enter a trade, and you know the stock price will increase (and be desirable for another trader after you buy it), youd go long on that stock.
You would go short on a trade if you know the price was going to decline. Your broker must borrow the shares from the owner (probably another broker) or lend them to you if they own them. If the broker cant borrow the shares for you, youre not going to be able to short the stock. Stocks that just started trading on the exchangeâ€”called Initial Public Offering stocks (IPOs)â€”are not shortable (able to be sold and then bought).
Traders can go short in most financial markets. A trader can always go short in the futures and forex markets (different from the stock market). Most stocks are shortable in the stock market as well, but not all of them.
Whether you go long or short depends on the amount of risk you can take on and your trading strategy and preferences.
There might be times when youre long on one stock and short on another. You might even find an occasion to short a stock, then go long on it. Some traders can keep shorting the same stock throughout a trading day.
The Bottom Line
When youre trading stocks, a long position is one where you buy a stock and try to sell it at a higher price. You can think of it as holding a stock for a long time, even though it might only be a few minutes.
A short is when you borrow and sell a stock or stocks. Think of it as being short that number of stocks and needing to repurchase them.
Which one you use depends on the specific stock and the price action when you are trading. They are both excellent strategies for turning a large number of small profits over time, but they both have their limitations. If youre long, you have to buy the stock and the options and then hope for a price increase. If youre short, you owe your broker several stocks no matter what the price ends at.
Using trade options can help you mitigate your losses for both long and short positionsâ€”just ensure that you dont risk more than you can afford to lose and stick to your entry and exit strategies.
Frequently Asked Questions (FAQs)
What is a stop-loss order?
A stop-loss order is an order placed with a broker to buy or sell a stock when it reaches a specific price. It helps to limit your exposure when trading so you dont lose too much money. It also means you dont have to constantly check on the performance of a stock since you have a measure in place to protect yourself.
Can you short cryptocurrency?
You can short cryptocurrency and you have many options for doing so. One is by using a cryptocurrency margin trading platform. You can also use a cryptocurrency futures market to short crypto. For example, you can short Bitcoin futures at the Chicago Mercantile Exchange.
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