Long (Long Position) - Explained
What is a Long Position?
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Table of ContentsWhat Does Going Long Mean?How Does a Long Position on an Investment Work?Pros and Cons of a Long Position
What Does Going Long Mean?
When an investor buys and owns a significant portion of security or financial instrument with the expectation that the security will increase in value in the nearest future, it is a long position. Investors that seek to make a profit from a rise in the price or value of securities take long positions on such securities. A long position can be taken by traders or market participants who purchase stock, commodity, currency or other financial instruments believing that they will rise in value. A long position is often used in the options contract, such as a cal option.
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How Does a Long Position on an Investment Work?
Investors that take long positions on certain securities have ownership of the portion of securities they have purchased, ideally, long positions are a common practice in the capital market or investment market. By taking a long position, an investor buys a significant amount of securities, stock, bonds or currencies with the aim of selling them when there is a significant increase in the price of those securities in the future. One of the major basics of a long position is the ownership of the financial instruments that an investor takes a long position on, this means the investor has the right to sell the securities as they wish without any restriction. A short position is the opposite of a long position. When investors take a short position on investment, they do have ownership of the securities, rather, the stocks are borrowed. Investors that take this position sell borrowed securities then buy back the securities when there is a decrease in price. Another category of market participants that take a long position in the market is a speculator. Generally, speculators are more interested in the profit they will make than ownership of securities, hence they go long on futures contracts when they believe there will be an increase in price which will generate profit for them. Here are the significant things to know about a long position;
- A long position (simply referred to as long) refers to the ownership of security with the expectation that the security will increase in value or price.
- Long positions, when taken by investors, require purchasing an asset, stock, bond, currency or other security believing that there will be a significant rise in price.
- Long positions are closely associated with futures contracts.
- In the capital markets, retail investors often go long on investments in order to realize profits.
- Companies and market speculators can also take long positions.
Pros and Cons of a Long Position
Generally, the position an investor decides to take on an investment, whether long or short determined their sentiments and believes in the market. It shows whether the investors have a bearish or bullish outlook about market trends. There are pros and cons of going long on an investment, investors are expected to take cognizance of these factors before taking long positions. Typically, the position an investor takes in investment is an indicator of the expectation of the investor over such an investment, which is a price increase in the case of a long position and price decrease in the short position. Pros of a long position are;
- Investors often go long when they perceive a bullish market trend.
- Long positions can be held for as long as an increase in price occurs.
- It reduces investment risks.
- It offers higher chances of selling investments at higher prices.
The Cons of long position are;
- Going long involves a huge amount of capital which can result in losing other opportunities that the market offers.
- It is not favorable in bearish markets, especially when the bearish trends are prolonged.