If you’re looking for ways to invest, you have numerous options. One is to invest in stocks, particularly if you like the idea of owning part of a company without the hassle of investing your time in managing and operating it. You can choose between the short position and the long position when buying stock. Each has pros and cons that you should study carefully before making your decision.
If you believe the market has a bullish trend, which means that stock prices are likely to rise, you could opt for the long position. Long position means that you own the stock by purchasing it on a stock exchange. This investment avenue works like any other -- if you hold your stock for a sufficient length of time you increase your likelihood of getting good prices when you sell. This is because you can use the long position option regardless of what’s going on in the market, and can hold on to your stocks until the price is to your liking.
Short positions work in reverse of long positions, relying on market fluctuations to make money. When you invest in the short position, you borrow stock from your broker and sell it in the market to another investor at the current price. Investors use the short option when they suspect that the market has a bearish trend, which means stock prices are likely to fall. So, when the prices fall, you buy the stock back at the lower price. For example, if the price of a stock is $50 and you’re expecting it will lose value to $40, you’ll borrow and sell the stock at $50. When the stock price reaches $40, you can buy it back, return it to your broker, and pocket the profit.
There's Always a Risk
When you buy stock in long positions, your risk factor is mitigated because you have the option of riding out a market downtrend, holding your stock until market conditions improve. With short positions, you stand to lose money if the market doesn’t move as you expected. For example, if you sold stock at $50 expecting its price to drop to $40, but the stock price instead increases to $70, you’ll have to buy the shares at the higher price to replace the ones you borrowed. You can’t wait indefinitely because you’ll have to replace the shares when your broker comes calling.
Investors choosing the short position typically opt for companies that aren't performing to the market’s expectations. Such stocks can be overpriced and likely to lose value. They might also look for other factors such as companies with bad balance sheets and cash flow statements, companies with products or services that don’t sell, or companies that offer very limited products. They rely on the possibility that the prices of these stocks will drop. Long-position investors are likely to look for companies that are performing well and have stronger stock prices. In this way, they rely on the possibility that the stock price will increase.
- Jupiterimages/Photos.com/Getty Images
- How to Recover From Financial Losses
- Contrarian Vs. Momentum
- Who Is Able to Invest in the Stock Market?
- The Size Limits for Small-Cap, Mid-Cap and Large-Cap Stocks
- Resale Value of a Condo vs. a Detached House
- What to Do When Losing Money in Stocks?
- How do I Invest in the Stock Market Without a Broker?
- What to Do With a 401(k) Nest Egg
- How to Invest In & Understand the Stock Market
- What Is a Primary Market & Its Role in Finance?