Long Position: Definition and Examples
A long position involves holding an asset with the expectation of price appreciation over time. In trading and investing, this view reflects a positive outlook on the market, where investors firmly believe an asset’s value will rise, resulting in capital gains.
This article addresses the long position definition and its benefits, explains long position stocks, demystifies leverage, and provides practical examples.
What Is a Long Position?
Typically, short and long positions are the two sides of the same coin. They’re essential in trading and investing because they provide various strategies to manage risk and profit and allow individuals to participate in the financial markets.
What Is Long and Short in Trading?
Investors take a long position when they buy assets or contracts and hold them for an extended period, hoping their value will increase. By contrast, short positions are commonly used to speculate on downward price movements.
But what is a long position in stocks? Long buying is considered ’bullish’ instead of ‘bearish’ (or short), where a security’s price is expected to drop. We differentiate between two long position types: leveraged and unleveraged.
We suggest reading our article, Long vs Short Positions: Guide to Wall Street Lingo, to better understand the short position.
Long Position Types
Investors can borrow cash in many markets to buy securities to maintain long (leveraged) positions. The borrowed (margin loan) amount allows you to trade large positions without having the total amount of funds required. It amplifies the possible returns, just like a lever boosts one’s strength when moving heavyweight.
Typically, investors start by setting up a margin account and borrowing funds from their broker to purchase stocks or other financial products. These securities and extra cash collateralize the loan in the account. When taking a loan, investors must pay interest on the borrowed amount at the call money rate (or broker loan rate)—typically higher (and negotiable) than the government treasury bill rate. Naturally, the larger the trader, the more favorable the call money rate. And that’s why institutional buyers obtain the lowest possible interest rates.
Suppose John holds $3,000 in a margin account and is going long on a stock. He wants to buy Tesla’s shares at $300 each and keep them for some time. With additional margin funds of up to $3,000, he purchases $6,000 worth of Tesla stock, equaling 20 shares. For now, we’ll ignore the call money rate.
Let’s say John’s long stock position in Tesla proves valid. In one month, the stock appreciates to reach $350 per share, and John sells the shares, earning $7,000. After paying the broker’s $3,000 margin loan and factoring in the initial $3,000 investment, he secures a profit of $1,000.
An unleveraged long position is a trading strategy where an investor relies solely on their equity or cash to fund the investment without borrowing money or assets from a third party. What if John invested only the initial $3,000 from his margin account?
Had he not borrowed funds, he would’ve made $500—the return of an unleveraged position, half of $1,000. By trading on margin, the potential profit doubles, but so does the losses; if the stock dropped to $250, John would lose $1,000.
Long Positions in Different Contexts
In various investment contexts, the term ‘long’ carries different meanings. It’s primarily associated with the time an asset is held but takes on a distinct definition regarding options and futures contracts.
Long Positions in Trading and Investing
What does it mean to go long on a stock? For retail investors, a long-position investment in stocks or bonds means that they believe the assets will increase in value over time. And so they aren’t rushing to sell them. This ‘buy-and-hold’ strategy infers a bullish view of the market, thereby diminishing the need for constant market-watching. And this further allows the assets to take their natural turn and appreciate with time.
Long Options Contracts
In an options contract, a long position relates to the value appreciation of the underlying asset and can express bullish or bearish sentiment. So, what is a long-call position precisely? Simply put, if investors want to benefit from a long position, they can hold call options or sell put options. Being long on a call means having the right to buy the asset while being long on a put option allows the selling of the underlying security.
Suppose Samantha has taken a long position in a call option regarding Tesla, giving her the right to buy 100 company shares at a predetermined price. She expects the value of the stock to increase, so having the right to purchase the shares at the locked-up price is the right trading strategy to make a profit.
Long Positions in Futures Contracts
Holding a long position for futures contracts is a way to hedge against unfavorable price movements. A manufacturing company may want to enter a long futures contract because its owner believes a much-needed commodity will rise in price. Whether or not the market value increases, the company must honor the agreement and buy the commodity at the stipulated price upon contract expiry.
Leverage is closely related to long positions because of its capacity to amplify the impact of a trade. It refers to the increased trading power available when using a margin account. But what exactly do we call leverage?
Leverage is the practice of borrowing funds or financial instruments to be able to trade a more significant portion of the market. It serves as a magnifying glass of the investor’s worth. Profits are much higher when the price moves in a favorable direction and vice versa. (Losses might be devastating should the market go down.) Leverage is a crucial component of establishing a long position.
Suppose that Tesla’s stock price dropped from $300 to $100. And John currently holds a long position, having 20 shares he initially bought for $6,000. In this case, his loss would be $4,000:
$6,000 – $2,000 = $4,000
Unfortunately, this exceeds John’s initial investment of $3,000 by $1,000, which means that the broker is responsible for covering the difference. Leverage multiplies the potential returns from a trade. At the same time, the market can quickly turn against investors. If your trade moves in the opposite direction of what you believe would happen, leverage will also significantly amplify the potential losses. Regulatory bodies require investors to hold initial and maintenance margins to prevent this.
The initial margin requirement is the percentage of the security’s purchase price that must be covered by cash or collateral when using a margin account. The current initial margin requirement set by the Federal Reserve is 50%. But brokerage firms frequently set it higher.
The maintenance margin is the minimum amount of equity that must be maintained in a margin account at any given time. This is another way to protect brokers from unexpected losses.
Long Positions: Advantages and Disadvantages
Advantages of Long Positions
- The stock market and individual stocks tend to increase over time. Historically, long positions are likely to make money. But it’s important to note that past performance does not guarantee future results.
- Long positions can also contribute to additional investor rights. If you hold a long position in a company’s shares, you may be given voting rights. And this enables you to engage in the company’s decision-making.
- An investor that buys and holds a security for one year will pay lower taxes on profits upon reselling.
Disadvantages of Long Positions
- Long positions will require you to lock up your funds for an extended period, implying a liquidity risk.
- A long position doesn’t guarantee success, so an investor’s long position may expire before realizing profits. In the context of long futures contracts, a market price drop will stipulate a loss. That’s because the holder has no choice but to buy the commodity at the agreed price higher than the current market value.
- There’s no way to time the market while longing a stock. So if you have no choice but to sell in a bear market, you may encounter losses.
Long and short positions are important yet a small part of the investment world. Understanding basic concepts about the financial markets will enable you to make informed decisions. That’s why we’ve prepared the Fundamentals of Financial Markets course, where seasoned professionals explain vital theories and practical applications.
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A long position is when an investor buys an asset, hoping it will appreciate over time. Because this view holds a positive outlook on the market, long-position investors typically benefit when prices increase. Suppose you purchase 100 shares of ABC Company’s stock at $50 per share because you think the firm’s projections look promising. If the price goes up to $70, you can sell your stock and make a profit of $20 per share, a total of $2,000 ($20 x 100 shares).
A long position represents an investment strategy, whereas a long call refers to options trading. A long call allows investors to buy an underlying asset within a specific timeframe at a predetermined price (strike price). When you buy a long call, you pre-purchase a call option at a premium, waiting for the underlying asset’s price on the market to surpass the strike price prior to the expiry date. And you can then exercise your right to buy the asset at the strike price and sell it at the current market price, realizing a gain. In other words, if the price rises, investors profit from the anticipated upward price movement through a long position in a call option.
A long-put position refers to buying a put option contract to profit from an asset’s price drop. By contrast, a short-put position relates to selling a put option with the obligation to buy the underlying asset if the option is exercised. The objective of a short put is to profit from a stock price increase by selling the put option at a premium.