What is the difference between long position and short position in the share market?

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For those who have just begun investing or still our novices, you would have perhaps heard these words too often in the past. In fact, every investor should know what a long position and short position means in the stock market and the share market.

A very practical example

Let's say you trade in the futures segment of the capital market in India. You want to buy 100 shares of Reliance, as you believe that the stock will rise in the future. Now, in the futures market you have to settle the purchase by selling the same within a time frame of 1 month, 2 months or 3 months.

Say you bought 100 shares of Reliance the settlement of which is in Nov 27. You now need to sell the shares by Nov 27. By buying the shares of Reliance you have created a long position in Reliance.

What is the difference between long position and short position in the markets?
Now, in a similar way say you first sell the shares of Reliance, you need to buy it back before Nov 27. This means you have created a short position in Reliance.

Let's bring some more clarity. Say you bought Reliance Industries 100 shares in the futures market at Rs 1000 on Oct 10. Now, on Oct 28 you find that Reliance has climbed by Rs 100. You sell the same and make a profit of Rs 10,000.

Now, say on Oct 29 you sold 100 shares of Reliance at Rs 1000 and on Nov 21 you bought back the 100 shares at Rs 900, here again you have profited by Rs 10,000.

Understanding it in simple terms

In simple terms when you buy Reliance first with the intention of selling it in the future, you have created a long position in Reliance. When you sell Reliance first with the intention of buying it back in the future, you have created a short position.

Those who create a long position, believe that a particular stock would rise in the future, while those who create a short position believe that the stock would fall in the future.

Long and Short Positions mostly in the Futures segment

Most of the long and short positions are created in the futures segment and very rarely in the cash segment. Traders mostly create these positions for short term gains and these are not investors. Investors generally tend to invest in shares for the long term. So, traders would be more interested in these terms then anyone else.

GoodReturns.in

Story first published: Friday, October 10, 2014, 11:00 [IST]
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