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Long vs. Short Position

Long Vs Short Position

There is both risk and variability inherent in trading futures. The preponderance of risk with futures contracts is related to the rate of interest set by the various futures exchanges. "Going long" or "going short" on a derivative security is a de facto choice by virtue of the borrower's intended purpose for his or her futures. In other words, defining something as a long or short position is really just ascribing a name to the process of selecting a course of action.

With the long position, buyers are looking to secure futures for one price and sell for more money than face value at a later date. Meanwhile, taking the short position is more complicated, but may work to the investor's advantage. In most cases, this will entail borrowing another investor's securities and selling at that cost, only to repurchase a contract on an "identical asset" down the road for a lesser fee and buy the asset to satisfy the contract, ultimately earning the holder a net gain.

Thus, a short or long position makes either a negative or positive presumption of what the coming months and years will hold for the price of the underlying stock in a futures contract. With a short position, the expectation of holders is that a given commodity will drop in value, and therefore, they will be able to buy the share back for less than they paid in their first transaction. Expectedly, being more or less its opposite, the long position will bank on a rise in the worth of futures, and thus, a greater ability to sell to other investors at a premium. In doing so, fans of this option are employing one of the fundamental tactics of the stock exchange.

As for what tactic between the long and short position is more common in general practice, consumers are more likely to put their faith behind the former option. This is commensurate with the advice of most financial analysts. At worst, with the long position the value of futures will go down and buyers will not be able to sell to recoup or make a net increase on their original investment. However, no more money can be lost.

As futures contracts require that holders either buy or sell by a certain date, a rise in the price of an asset will mean that short position holders are compelled to purchase the underlying stock if they cannot achieve a sale, leaving them down even more money. In all, while going short has a possibility of making the investor richer than if going long, the added danger of losing makes this option a lot more probable to end badly for the buyer.

NEXT: Read This Before Any Futures Exchanges

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