Introduction

When I started to research the topic of investing I always heard terms buying long and selling short. I was not sure what do they mean. For me selling short was too abstract to realise what it actually means, is it selling the stock the you own? Is it betting that someone is going to sell stocks?

The other option “Buying Long” was also not clear to me. First I thought this has something to do with value investing or with opportunity to buy stocks. I was never sure what it actually is.

In this post I will try to explain what these terms are

Buying Long

Let us start with an example for the expression “Buying Long”. Imagine you buy 10 shares of Verizon (VZ) for $40. In the investing world the term used is “Opening a Buy Position”. Then you wait some time and the stock prices rises to $41 and you decide to sell your stock. Well you are not selling your stock, but you are “Closing a Buy position”. In a perfect world (where you do not pay fees) you would make 10 dollars on those 10 shares if you decide to sell them. This is where the idea comes from that if you buy shares at a low price and sell them high (buy low – sell high) that you can make a lot of money. This idea is great in theory but it is hard to execute it in reality. The buying part of the expression refers to this concept of exchanging something that you own for something that you think is valuable.

So we have covered the term buying, but what is with the “long” part of the term. Well according to investopedia, a long position refers to the purchase of an asset with the expectation that it will increase in its value. This just comes from the investment world. If we translate “Buying Long” to normal terms you get the simple explanation.

Buying long is just buying an asset with the hope that after a “long” period of time it will return more than you have invested.

Buying is in investing terms the action of opening a position with the presumption that the price will increase.

Selling Short

The second method is “Selling short” and as previously we start off with an example. To avoid common misconceptions, selling stocks is not actually selling stocks that you own. You are “Opening a Sell Position” on a stock. This means that you do not have to own the stock, before opening a sell position.

When you “Open a Sell Position”, you borrow 10 stocks from your broker and sell them immediately. This means that at that moment you do not own the stocks that you borrowed, but you have the money for which you sold the stocks. Then you wait for the price of the stock to drop below the price that you sold them for, and you buy them in order to return them to the broker.

So if you “Open a Sell Position” for 10 Verizon stocks for $10. You immediately sell 10 Verizon stocks for 10$ each. Then you wait until the price of Verizon is less than 10$ and then you “Close the Sell Position”. In this case if the price was 8$, you would buy 10 Verizon stocks for 80$ and return them immediately to the broker and you keep the 20$ difference between the sell and buy price.

Now you are thinking, but where is the stock selling and why is it called selling short?

Each broker charges interest for every day that you owe the borrower stock. This pushes you to close the sell position as soon as possible. This is why selling is associated with the term “SHORT”.

You are basically borrowing stocks that you do not own and selling them, with the intent to buy them when they are cheaper and return them to the issuer of the stock loan.

What could go wrong? Well many things, imagine you borrow 10 stocks of company A and then sell them for 10$ each. After some time the price of the stocks jumps to 50$. You now have to buy 500$ of Stocks to return the 100$ stock loan. You might think, well okay I will wait until the stock price goes down. While you are waiting you do not have liquidity and you have to pay fees for the stocks that you borrowed, trust me this is not fun.

Also the issuer can request the return of the stocks at any time with minimal notice. This is why you usually keep the borrower stocks for a short period of time.

Conclusion

Looking at just these two basic terms it is visible how hard it is start investing in stocks or other investments. Going long is buying stocks and holding them for a longer period of time, with the hope that their price will increase. Shorting stocks is making profit on the decrease of stock price.

Another interesting thing is that going long or shorting are just terms coined in the investment world.

If you want to know more about swing trading or simple technical analysis, you can read the following blog posts:

Sources:

[1] https://www.investopedia.com/ask/answers/05/shortsaleclosed.asp

[2] https://www.investopedia.com/terms/l/long.asp