Long and short positions as investors
Have you ever heard of short-sellers? In today’s post, we would be looking at what short-sellers and long sellers do.
To invest wisely, you need to be abreast of the most salient strategies to invest. These strategies are called investing positions and an investor can take a particular position or mix up a couple of positions for higher returns. A stock moves and appreciates or depreciates. For a wise investor, you can apply some strategies to benefit from these movements apart from just investing in the stock itself. An investor can decide to buy in the long position or sell in the short position. These two positions are strategies for profiting in the stock market.
Long Positions
There are two types of positions: the long and the short position. For further differentiation, investors can engage in investment options called calls or puts. Options are financial contracts that give an investor the freedom to engage in a time-specific and price-specific trade of an asset. That is, investments can be a long call or long put or short call or short put. Options can be bought through the options market or stockbrokers.
When an investor takes a long position, it means that they are buying stock. The goal of a long position is to benefit from a hike in price. When you buy stock, you are engaging in a long stock asset purchase with the hope of it getting great returns. When an investor engages in a long call position, they purchase a call option and benefit from a rise in the financial security’s price. The investor is making a bet that the underlying asset price is going to increase in value before the expiration date. For example, if you buy a share XX with a price per share of $10. The trader can buy a call option for XX with a strike price of $15 to expire in a month. This means that he expects the price to rise above $15 in the succeeding month. Let’s assume the call option comes for $1 per share. the investor has a right to buy 100 shares of XX at the $15 price until one month of expiration. One option contract equals 100 shares of the stock. If the stock price rises to say, $30 then that means that the investor can buy 100 shares of XX at the $15 and quickly sell it at the market price of $30 to make a profit of $15 per share and offset the $1 per share premium paid to secure the investment.
With a long put, the investor purchases a put option. When the underlying financial security value drops, a puts value rises. Investors buy a long put option in anticipation of a decline in the underlying asset. By doing this, an investor could purchase along put as a way to hedge or insure a long position in the underlying asset. That means that if the underlying asset or security fails, the long put increases in value and offsets the loss.
Short Positions
When an investor takes a short position, it means they are selling stock. Short positions would aim to benefit from a drop in the price of the asset.
With a short position, it involves margin trading where an investor puts a margin deposit as collateral at the brokers to loan them several shares. They then sell the shares at the current market price and keep the liquidated funds in their account. When the stocks do go down in price, they then buy back the shares at the reduced price and replace the shares the brokers loaned them. After paying back the broker, the margin of profit becomes tied to how much the stock depreciated.
You however need to be a trusted investor to be able to get a short stock position. And you might be required to pay some deposits and costs to the broker.
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Conclusion
A good investor is one that diversifies their portfolio. If you take the time to understand the different types of positions and calls, you can find incredible investment opportunities.
