Short selling and going long on a stock are two different investment strategies used by traders and investors. Both strategies involve buying and selling stocks, but the key difference is the timing and direction of the trade. Here at PeakBot, we will teach you the key aspects of both.
Longing
An investor opens a long position, or “is long on a stock” when price is expected to increase. The investor buys shares of a stock with the expectation that the price will go up. Later on they will hope to sell the shares at a higher price for a profit.
For example, if an investor buys 100 shares of XYZ stock at $50 per share and the price increases to $60 per share, the investor can sell the shares for $6,000 and make a profit of $1,000 ($6,000 – $5,000).
Longing is considered a less risky strategy than short selling because the potential losses are limited to the amount invested. If the stock’s price goes down instead of up, the investor can hold onto the shares and wait for the price to recover or sell them at a loss.
Short Selling
Short selling, also known as shorting or shorting a stock, is used when a stock’s price is expected to decrease. The trader borrows shares of a stock from a broker and sells them on the open market. Once the price drops, the trader buys the shares back at a lower price and returns them to the broker. The difference is then pocketed as profit.
For example, if a trader borrows and sells 100 shares of XYZ stock at $50 per share, and the price drops to $40 per share, the trader can buy back the shares for $4,000 and return them to the broker. The trader would make a profit of $1,000 ($5,000 – $4,000) from the short sale.
Short selling is considered a high-risk strategy because the potential losses are unlimited. If the stock’s price goes up instead of down, the trader will have to buy back the shares at a higher price, resulting in a loss. In the example above, if the price of XYZ stock increases to $60 per share, the trader would have to buy back the shares for $6,000 and would lose $1,000 on the trade. Hypothetically the share price could endlessly go up resulting in uncapped losses for the trader.
In conclusion, short selling and going long on a stock are two different investment strategies used in the stock market. Short selling is a high-risk strategy that involves borrowing and selling a stock with the expectation that the price will decrease, while going long on a stock is a less risky strategy that involves buying a stock with the expectation that the price will increase. Both strategies have their own advantages and disadvantages and require a different level of risk tolerance and market knowledge.