Long Trade vs Short Trade
What is going long or short? When do I use them?
You initiate a long trade when you buy an asset with the expectation to sell it at a higher price in the future and make a profit.
In a long trade, you buy an asset and wait for it to go up to sell it at a higher price. When you go long, your profit potential is unlimited. The price of the asset could rise indefinitely. The largest loss possible you could experience is if the share price dropped to $0, resulting in a %100 loss limited to the amount you paid in the first place.
A short trade is initiated by borrowing an asset to sell it, with the intent to repurchase it at a lower price, take a profit, and return the shares to the owner.
The short trade is a little different from a long trade. In a short trade, you borrow an asset, sell it, and wait to buy it at a lower price. When you short a stock, your profit potential is limited to the amount you paid, but the risk becomes unlimited because the price could rise indefinitely.
Shorting stocks is popular with professional traders, and it is not recommended if you’re not sure about the stocks. While it is a good tactic for making a profit, it tends to drive stock prices to drop too quickly when done on a large scale. It may cause a big loss that you can’t afford. There are issued warnings about shorting stocks based on what you hear or see in social media, news outlets, or websites to keep you and other investors from being used to manipulate the market.
When do I use them?
Whether you go long or short depends on the amount of risk you can take on. You would go long if you believe the stock will rise in price. In contrast, you would go short if you believe that the stock will decline.
Which one you use depends on the specific stock and the price action when you are trading. They are both excellent strategies for turning a large number of small profits over time, but they both have their limitations. If you’re long, you have to buy the stock and the options and then hope for a price increase. If you’re short, you owe your broker several stocks no matter what the price ends at.