The stock market involves a variety of terms and lingo that may be difficult for the novice to understand. You may hear the words “long" and "short" in the stock market. As an investor, long and short describe your market position with a specific stock. A firm grasp of terms may help you navigate the stock market more successfully.
Investors own stocks and securities – known as being “long” in any stocks owned and held. Investors “go long” when they purchase shares. While the investor holds the shares, account information shows “long” and the number of shares held. If an investor sells part of the total number of shares, account information will indicate “long” and the reduced number of shares held. If an investor sells all shares, the account reaches zero, the account is “flat” and documentation indicates the delivered shares.
When investors anticipate that a security will decrease in value, the investor might borrow shares of stock from a brokerage account and sell them -- known as short-selling stocks. In this situation, the investor borrows shares from someone else (almost always a broker), sells the shares immediately and then later attempts to buy the shares back at a lower price. If the share prices go down in price as anticipated, the investor repurchases the shares at the lower price to "cover a short position" and returns the stock to the lender. This results in a profit for the investor.
Brokerage firms provide special accounts with a borrowing limit for investors; these are called margin accounts. Investors can borrow funds to purchase securities, using the securities as collateral. The brokerage firm will charge interest for these financing services. Margin accounts are necessary for short-selling stocks. A margin account is necessary because this technique involves selling stock that the investor does not own. The margin account provides collateral for the investor's position and guarantees the return of the shares in the future
Short selling requires careful timing and a strong understanding of the stock market. If the investor is mistaken and the stock rises instead, the investor will lose money.
Individual Investor Positions
A brokerage firm keeps individual positions separate in the investor’s account. The broker does not combine separate shares as one total. For example, an investor who owns 100 shares of one stock, 250 shares of another stock and 400 shares of another stock will have each stock listed separately – “long 100, long 250 and long 400” -- in the account, not listed as “long 750.”
Bullish or Bearish
The standard stock market descriptors “bull” and “bear” may describe an investor’s attitude towards the market. Just as a bull market describes a strong or rising stock market, a long investor who expects stocks to rise may be “bullish” or “bull.” Similarly, as a bear market describes a weakening stock market, a short investor who expects stocks to decrease may be “bearish” or “bear.”
- All About Stock Market Strategies; David Brown et al.
- Investor Guide: Short Selling
- Financial Web: Long, Short, Flat: What Your Position Means
- U.S. Securities and Exchange Commission: Margin: Borrowing Money To Pay for Stocks
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