Investing Strategies - Part VI

The Long And The Short Of It

Two terms that you'll hear thrown around quite a bit when dealing with a broker or a market player are the terms long and short. Usually when they are used, the speaker assumes that the listener just automatically knows what it means.

Before I decided to go for my license, I didn't know what they meant. I had heard the terms, and I knew what short selling was, but this long concept...What was that all about? And once I became a broker I found that there are really quite a few people who don't know either.

Essentially, they are the two of the three positions that you can have in any stock. The most common position is one of no position. You don't own the stock, you don't owe the stock, and you have absolutely no financial stake in the stock. No position is a position in and of itself and is usually the one that most people forget about.

The next most common position and the one that most people are familiar with is the long position. This is where you have bought the stock and you own it in your account. Sometimes a certificate might be issued to represent your shares. But the bottom line is that you own the stock just like you do your TV, your computer, or your car.

Short is the opposite (strangely enough!) of long. Shorting is where you borrow the stock and sell it, with the hope of being able to buy it back at some point in the future for less money than you sold it for. When you short a stock, you literally end up short in your account; you owe it instead of owning it.

The easiest way that we used to teach the concept of long and short was to have people think of it in terms of timeframe. When you own a stock - you're long - chances are that you'll want to hold the stock for a long time. When you've borrowed a stock - you're short - chances are you'll want to get out of that position in short order.

It's really a pretty simple concept, but one that is almost never explained.