I heard the terms buying long and selling short and was not sure what do they mean. Then I started doing some research, because we know that a good trader is a trader that knows what he is doing. Let us start with the explanation of the expression “Buying Long”. Imagine you buy 10 shares of Verizon (VZ) for $40, then you wait some time and the stock prices rises to $41. In a perfect world (where you do not pay fees) you would make 10 dollars on those 10 shares if you decide to sell them. This is where the idea comes from that if you buy shares at a low price and sell them high (buy low - sell high) that you can make a lot of money. This means that you benefit.
The second method is “Selling short”. Here you borrow 10 stocks from your broker and sell them. Then you wait for the price of the stock to drop below the price that you sold them for and you then buy them in order to return them to the broker. So if you buy 10 Verizon stocks for $10 and sell them for §10, then you wait for the price to drop to $9 and you buy them. You return the stocks to your broker and keep the profit for yourself.
These were the win scenarios. But if you buy a stock with the intention to “Buy Long” for $10 and the price falls to $8, then you have lost $2 per share. You either accept the loss or you keep the stock until the next increase, which may never come and you end up loosing more money. The same can be said for “Short Selling”, when you borrow stocks from your broker for $10 and sell them, then the price goes up to $13 and you have to buy them for the price. Your broker is expecting the same amount of stocks that he loaned to you.
Disclaimer:
This is not financial advice.
I am not a financial advisor.
The intention of the post is just to share my experiences.
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