Long and short positions

     
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Long & Short Positions

In the trading of assets, an investorEquity TraderAn equity trader is someone who participates in the buying and selling of company shares on the equity market. Similar lớn someone who would invest in the debt capital markets, an equity trader invests in the equity capital markets & exchanges their money for company stocks instead of bonds. Bank careers are high-paying can take two types of positions: long and short. An investor can either buy an asset (going long) or sell it (going short). Long & short positions are further complicated by the two types of optionsStoông xã OptionA stoông chồng option is a contract between two parties which gives the buyer the right lớn buy or sell underlying stocks at a predetermined price và within a specified time period. A seller of the stock option is called an option writer, where the seller is paid a premium from the contract purchased by the stochồng option buyer.: the gọi & put. An investor may enter into a long put, a long hotline, a short put, or a short Hotline. Furthermore, an investor can combine long & short positions into lớn complex trading & hedging strategies.

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Long Positions

In a long (buy) position, the investor is hoping for the price khổng lồ rise. An investor in a long position will profit from a rise in price. The typical stochồng purchaseStoông xã AcquisitionIn a stock acquisition, the individual shareholder(s) sell their interest in the company to lớn a buyer. With a stoông xã sale, the buyer is assuming ownership of both assets & liabilities – including potential liabilities from past actions of the business. The buyer is merely stepping into the shoes of the previous owner is a long stoông xã asphối purchase.

A long call position is one where an investor purchases a Call option. Thus, a long Call also benefits from a rise in the underlying asset’s price.

A long put position involves the purchase of a put option. The logic behind the “long” aspect of the put follows the same lô ghích of the long hotline. A put option rises in value when the underlying asset drops in value. A long put rises in value with a drop in the underlying asmix.

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Long Position Profits

In a long asphối purchase, the potential downside/loss is the purchase price. The upside is unlimited.

In long calls và puts, the potential downsides are more complicated. These are explored further in ouroptions case studyOptions Case Study – Long CallTo study the complex nature & interactions between options và the underlying asset, we present an options case study. It"s much easier to.

Short Positions

A short position is the exact opposite of a long position. The investor hopes for, & benefits from, a drop in the price of the security. Executing or entering a short position is a bit more complicated than purchasing the asphối.

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In the case of a short stoông chồng position, the investor hopes to lớn profit from a drop in the stochồng price. This is done by borrowing X number ofsharesStockWhat is a stock? An individual who owns stochồng in a company is called a shareholder and is eligible to lớn clayên part of the company’s residual assets & earnings (should the company ever be dissolved). The terms "stock", "shares", & "equity" are used interchangeably. of the company from a stockbroker và then selling the stoông chồng at the current market price. The investor then has an open position for X number of shares with the broker, that has to lớn be closed in the future. If the price drops, the investor can purchase X amount of stock shares for less than the total price they sold the same number of shares for earlier. The excess cashCash EquivalentsCash & cash equivalents are the most liquid of all assets on the balance sheet. Cash equivalents include money market securities, banker"s acceptances is their profit.

The concept of short selling is often difficult for many investors to lớn grasp, but it’s actually a relatively simple process. Let’s look at an example that will hopefully help clarify things for you. Assume that stochồng “A” is currently $50 per mô tả. For one reason or another, you expect the stoông chồng price lớn decline so you decide khổng lồ sell short to lớn profit from the anticipated fall in price. Your short sale would work as follows:

You put up a margin deposit as collateral for your brokerage firm to lớn loan you 100 shares of the stoông chồng, which they already own.When you receive sầu the 100 shares loaned lớn you by your broker, you sell them at the current market price of $50 per mô tả. Now you no longer have any shares of the stoông chồng, but you vì have the $5,000 in your trương mục that you received from the buyer of your 100 shares ($50 x 100 = $5,000). You are said khổng lồ be “short” the stochồng because you owe your broker 100 shares. (Think of it as if you said khổng lồ someone, “I’m 100 shares short of what I need khổng lồ pay back my broker.”)Now assume that, as you anticipated, the stock’s price begins lớn fall. A few weeks later, the price of the stock has dropped all the way down khổng lồ $30 a cốt truyện. You don’t expect it to lớn go much lower than that so you decide khổng lồ cchiến bại out your short sale.You now buy 100 shares of the stoông chồng for $3,000 ($30 x 100 = $3,000). You give those 100 shares of stoông chồng khổng lồ your broker to pay hlặng back for (replace) the 100 shares he loaned you. Having paid baông chồng the 100 cốt truyện loan, you are no longer “short” the stochồng.You have made a $2,000 profit on your short sell trade. You received $5,000 when you sold the 100 shares your broker loaned you, but you were later able to lớn buy 100 shares to pay him back for only $3,000. Thus, your profit is figured as follows: $5,000 (received) – $3,000 (paid) = $2,000 (profit).

Short stochồng positions are typically only given to lớn accredited investors, as it requires a great deal of trust between the investor và broker to lớn lover shares khổng lồ exexinh tươi the short sale. In fact, even if the short is executed, the investor is usually required to lớn place a margin deposit or collateral with the broker in exchange for the loaned shares.

Other Short Positions

Short Hotline positions are entered inkhổng lồ when the investor sells, or “writes”, a điện thoại tư vấn option. A short điện thoại tư vấn position is the counter-tiệc nhỏ lớn a long Gọi. The writer will profit from the short điện thoại tư vấn position if the value of the điện thoại tư vấn drops or the value of the underlying drops.

Short put positions are entered into when the investor writes a put option. The writer will profit from the position if the value of the put drops or when the value of the underlying exceeds the strike price of the option.

Short positions for other assets can be executed through a derivative known as swaps. A credit mặc định swap, for example, is a contract where the issuer will pay out a sum lớn the buyer if an underlying asmix fails or defaults.

The Bottom Line

There is a wide variety of long & short positions that traders may adopt. A knowledgeable investor will have sầu grasped the many advantages and disadvantages of each individual type of long & short positions before attempting lớn incorporate using them inlớn his or her trading strategy.


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