Derivatives fall under calculus

What do long and short mean? Basic terms explained for investors

Anyone who is new to the world of the stock market can quickly get stuck with some terms. Especially when they are important but not explained.

For example, a long or short position is opened. Or an investor goes long or short. These expressions are very common and bring certain facts to the point.

Long and short: definition of buyer and seller

But what is long and short? According to the definition, these are generally the personal positions in a financial business. With long you are in the buyer's position, with short in the seller's position.

Long and short - the short definition of course says little about the context and the goals.

Hope for rising prices

An investor who wants to make a profit with rising share prices, for example, “goes long”. So he opens a long position. With the purchase of the share he is invested long. The whole thing works with almost all other securities, but also with financial instruments that relate indirectly to underlying values ​​such as stocks, bonds, currencies or entire indices.

In this case, they are derivatives. Options and warrants or certificates with leverage are known, for example. Here, however, you have to be careful whether long refers to the traded derivative or the underlying asset. In any case, a long derivative rises in value when the price of the underlying asset rises.

Bet on falling prices

Long describes the widespread procedure in which one hopes for rising prices. But falling prices do not have to be a dilemma either - if you go short. According to the definition, short is the opposite action too long. Anyone who opens a short position is betting on falling prices with corresponding profits with their short investment. In this case, rising prices bring losses.

Compared to long, however, short requires more explanation. Anyone who goes short with stocks does so through a short sale, also known as shortselling. Put simply, you are selling stocks that you don't even have.

Short position: an example

With an example it could look like this: Mr. Meier goes short with one share at 100 €. He is sure that it will quickly lose value. He sells the stock short at the current price, and it actually falls to € 80 after that. If he closes his position on time, he has made a 20% profit.

As with long, you can also go short with derivatives and bet on falling prices of the underlying asset. This works, for example, with a short ETF or a short certificate on the Dax. If the German share index goes downhill, profits are made.

What seems plausible, however, is not that simple in practice. Short trading carries a higher risk of loss than long positions. When you sell short, you borrow the stock that you don't own. And the broker or bank charges a fee for this loan.

If the calculation does not work because the price rises, you have to buy back the share at the higher price, transfer ownership to the bank and the fee is gone. However, if the prices fall, the fee must then also be deducted from the profit. The same applies in the event that the course remains unchanged.

Long, short and other constellations of terms

While long and short stand for the buyer and seller side by definition, there are, for example, the terms call and put for options. However, since there are two levels here, i.e. the option and the underlying, buying or selling can relate to one as well as the other.

There are four constellations in the interrelationship: One speaks of a long call if one is a buyer of a call option. With a short call you are the seller of the same. If you buy a put option, it is a long put and as a seller, or more precisely writer, it is a short put.

Friday is the last Witches' Sabbath of this year On Friday of this week for the 4th and therefore also for the last time this year the witches dance on the stock exchanges. Now read the details and background. > read more

© Verlag für die Deutsche Wirtschaft AG, all rights reserved