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Buying Long and Selling Short
Traders take either a long or short position depending on their expectations of the future price of an asset:
1. Buying long = Bullish: expect price to increase in the future
2. Selling short = Bearish: expect price to decrease in the future
Buying Long
Ordinary investment practice is typically “buying a long position,” which means you are taking ownership of an asset or contract. This is a “bullish” position, because it implies that you expect the price to go up in the future. Similarly, a long position in a futures contract or similar derivative means the holder of the position will profit if the price of the underlying security goes up.
Selling Short
Short selling is the opposite of a long position; it is the practice of selling an asset or contract in the hope of repurchasing it later at a lower price. This is a “bearish” position, because it implies that you expect the price to decline in the future.
"Short selling" or "being short" also is often used as a blanket term for those strategies that allow an investor to gain from the decline in price of a security. One such strategy is buying options known as puts. A put option is the right to sell an underlying asset at a given price; the owner of the option benefits when the market price of that asset falls and he is able to sell the asset at the agreed-upon higher price. On the other hand, a short position in a futures contract, or to be short a
futures contract, means the holder of the position has the obligation to sell the underlying asset at a later date. If the price of the asset goes down he would lose money unless he had already offset the contract with an exact, opposite futures purchase before the delivery date..
The act of buying back the shares that were sold short is called “covering the short.” Day traders and hedge funds often use short selling to allow them to profit on trading in stocks that they believe are overvalued, just as traditional long investors attempt to profit on stocks that are undervalued by buying those stocks.
