What is a long position in stocks?

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What is a long position in stocks? Well, a long position is the ownership of company stock. For example, when you purchase 100 shares of XYZ Company at $10 per share, you have a long position in that stock. You have a long position because you own the stock and are bullish on its future—long positions profit when stocks go up in value. If you own a stock, another party must sell it to you. The opposite of being “long” is being “short” a stock. This means you believe the stock will fall in price, so you borrow those shares from someone else and sell them to hopefully buy them back at a lower price and return them. In other words, if you are “long” XYZ Company, then someone else is “short” XYZ Company.

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What is a short position in stocks?

A short position in stocks is the ownership of company stock that you have borrowed from someone else and then sold. For example, when you sell 100 shares of XYZ Company at $10 per share, you have a short position in that stock. You have a short position because you sold the stock you did not own—short positions profit when stocks go down in price. If you sell a stock that you borrowed, someone else must buy it. The opposite of being “short” is being “long” a stock. This means you believe the stock will rise in price and buy shares from someone else and return them, hoping to sell them back at a higher price to keep the profit. In other words, if you are “short” XYZ Company, then someone else is “long” XYZ Company.

Long-term investing

Long-term investing means holding your stock positions for at least one year. Long-term investing is fundamentally different from short-term trading. Trading occurs daily or weekly; you need to be right every time. So if you bought XYZ Company at $10 and you believe it will rise to $25 by the end of the current year, you are considered long-term bullish on XYZ. Long-term investors generally like to buy stocks with low price-to-earnings (PE) ratios. PE is a stock’s price divided by its earnings per share. In addition, long-term investors generally like to buy stocks with low price-to-book ratios (PB). PB is the stock price divided by the company’s book value (assets minus liabilities).

Capital Gain and Loss Calculation

When you buy 100 shares of stock at ten dollars per share and then sell it at $20 per share, you have a capital gain of $1000 ($2000 sales price – $1000 cost). If you bought the same 100 shares at $5 per share and then sold them at $10 per share, you have a capital loss of $500 ($1000 sales price – $500 cost). If your stocks fall in price and you sell them at a loss, you can claim capital loss deductions against your gains. This allows you to reduce your overall capital gains tax bill. If your stocks rise in price, you must pay taxes on your capital gains even if you don’t sell them.

Short Selling Strategy

When you sell stocks you don’t own, you are “shorting” them. In other words, you are hoping they fall in price so you can eventually buy them back at a lower price and return them to your lender. When stocks fall in price, you buy them back and return them to your lender. If the stocks fall enough, you can return the same shares you borrowed. This is called “covering” your short position. Short selling is a good trading strategy, but it’s risky. It would be smart to wait for the stocks to fall in price before you can cover your short position. So your timing must be perfect. If you sell short and the stock price rises, you lose money. If you sell short and the stock price plummets, you lose a lot of money.

Long-term Investment Strategy

As an investor, you desire to buy undervalued stocks with a good long-term growth outlook. For example, if you buy $1000 worth of XYZ Company at $10 per share, you own $1000 worth of stock. If the stock price rises to $20 per share, your $1000 investment has grown to $2000 worth of stock. A company’s value is determined by its stock price, earnings, and book value. So if you buy $1000 worth of XYZ Company at $10 per share, you own 10% of the company because its book value is $100 per share. If earnings rise to $20 per share, the company is twice as valuable. If the stock price rises to $20 per share, you have a $2000 investment when you only put in $1000.

Summary

A long position in stocks is the ownership of company stock. An example is when you buy 100 shares of XYZ Company at $10 per share, you have a long position in that stock. If you own a certain stock, someone else must sell it to you. The opposite of being “long” is being “short” a stock. This means you believe the stock will fall in price, so you borrow shares from a seller on the market and sell them to buy the stock back at a significantly lower price and return them to the seller. Long-term investing means holding your stock positions for at least one year. Long-term investors generally like to buy stocks with low price-to-earnings (PE) ratios. PE is a stock’s price divided by its earnings per share. In addition, long-term investors generally buy stocks with low price-to-book ratios (PB). What is PB? Price-to-book is the stock price divided by the company’s book value (assets minus liabilities). For example, when you buy $1000 worth of XYZ Company at $10 per share, you own $1000 worth of stock. If the stock price rises to $20 per share, your $1000 investment has grown to $2000 worth of stock.