Long (finance)

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In finance, a long position in a financial instrument means the holder of the position owns a positive amount of the instrument. It is contrasted with going short.[1][2]

Security

In terms of a security, such as a stock or a bond, or equivalently to be long in a security means the holder of the instrument owns the security and will profit if the price of the security goes up. It is an essential investment concept and it is applicable across various asset classes such as currencies and commodities. Going long in a security is the more conventional practice of investing.[3][4][5] For example, if Marks & Spencer is trading at 100 GBP and it is expected to rise to 150 GBP per share; the investor buys 1000 shares and the share value does cross 150 GBP in a couple of weeks, the investor makes profit. As there are no limit to potential gains, the same works for potential losses.

Future

Going long in a future means the holder of the position is obliged to buy the underlying instrument at the contract price at expiry. The holder of the position will profit if the price of the underlying instrument goes up, as the price at the contract was lower. Longer futures contracts are entered into to hedge against irregular price movement and to offset market volatility. For example, an airline enters into a long futures contract to buy 2000 barrels of oil at the end of 3 months at $50 per barrel, costing $100,000. Irrespective of the price per barrel at the time of purchase, the airline is obligated to buy at the committed price and the supplier is expected to deliver at the same price. [6][4]

Option

An options investor goes long by buying call options or put options on it.

Different from going long in securities or futures contract, a long position in an option does not necessarily mean that the holder will profit if the price of the underlying instrument goes up. Going long in an option gives the right (but not obligation) for the holder to exercise it. If the price rises to above the strike price, the owner of a call option will probably buy the instrument and (at least on paper) will gain if the difference between the price at that time and the strike price is greater than the premium which he paid. With a put option on the other hand, the owner of the option will profit (on paper) if the price of the instrument goes up more than what the buyer paid as premium even if the buyer doesn't exercise the option. If the price ends up below the strike price, the buyer will be better off exercising the option to sell at the strike price, but whether the buyer gains or loses depends on how much the instrument was worth when the option was bought. If the price drops below the strike price and the buyer still has the instrument at the maturity of the option, then the buyer is better off having the option (and using it) than if the option did not exist, but of course, the buyer had to pay the premium in order to have the option.[6][7]

See also

References

  1. ^ "Stock Purchases and Sales: Long and Short | Investor.gov". www.investor.gov. Retrieved 2018-10-10.
  2. ^ "Definition of "Long position" - NASDAQ Financial Glossary". NASDAQ.com. Retrieved 2018-10-10.
  3. ^ Harrington, Shannon D.; Catts, Tim (Sep 12, 2010). "Bond Buyers Who Went Long Get Burned on Yields: Credit Markets". Bloomberg News.
  4. ^ a b "Long Position: Meaning and Definition". Retrieved 2018-10-10.
  5. ^ "What Is a Long Position (in Investing)? - TheStreet Definition". www.thestreet.com. Retrieved 2018-10-10.
  6. ^ a b Momoh, Osi (2003-11-23). "Long (or Long Position)". Investopedia. Retrieved 2018-10-10.
  7. ^ Munarriz, Rick (2015-06-01). "Long Position vs. Short Position -- The Motley Fool". The Motley Fool. Retrieved 2018-10-10.


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