Trading basics: The difference between going long and going short

Julie Brownlee, Fsp Invest, 26 Jan. 2015

Tags: trading, trading basics, going long, going short, short, what is going short, what is going long, short trading

If you decide to trade instead of invest, there are a number of differences.

With trading, you tend to use geared instruments. These geared instruments multiply your profits or your losses.

But that’s not the only difference. You can choose between going short and going long when you trade.

So what’s the difference between the two?

Read on to find out…

How going long works

When you invest, unless you’re selling shares, you go long. In other words, you buy.

In trading, you go long or buy into a position if you think that the underlying asset is going to rise in price.

With trading, the underlying asset could be a share, an index, a currency or a commodity. This will depend on what type of instrument you trade.

How going short works

Unlike investing, when you trade, you can opt to go short. This means that instead of buying, you sell. This is where going short comes into it – you’re short so many shares, for example.

What going short means is if you think the price of an underlying asset is going to fall in value, you can place a short trade. To close this trade, you’d buy back.

This is one aspect of trading which makes it very versatile as you can potentially profit from falling as well as rising markets.

But short trading does come with its risks.

The price of a share, or other underlying asset, can potentially rise exponentially. This means that your losses are potentially limitless with short trading. But when you trade, you should use stop losses and other money management techniques to limit your risks.

With long trades, the lowest an underlying asset’s price can potentially drop to is zero, so your losses are limited.

So there you have it, the difference between going long and going short.

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