Long Vs. Short Stocks

by Tim Plaehn, studioD Google

Stock traders take long or short stock positions based on the expected share price direction.

Mario Tama/Getty Images News/Getty Images

In the jargon of stock market investing, the terms long and short indicate the type of position an investor has in a particular stock. Investors who buy and own stock shares are "long" those shares. A "short" position involves selling shares a trader does not own.

Two Way Securities Trading

In the trading of securities, there are traders who think stocks are going up, so they buy shares to profit from the gains. This trade makes sense to anyone who understands that you make money by buying something and selling it for a higher price. There are also traders and strategies that profit from falling stock prices. This concept is a little harder to understand — making money from something that is going down in value. The stock market rules allow trading in both directions and the result is that traders can have either a long or short position in a stock.

Selling Stock Short

The strategy of short selling stock will profit if the share price of the stock declines. To sell shares short, a trader borrows the shares from her broker and sells those shares to open a trade position. To close out the trade, the shares must be repurchased -- called "covering the short position" -- and returned to the broker. If the share price does decline in value, the short trade will be profitable. If the share price goes up, the trader loses money on a short trade. When financial news programs discuss short selling, short interests or covering short positions, the discussion is about shares sold short with the goal of profiting from falling share prices.

Long Stock Positions

To be long stocks is to own shares. A long position is entered to profit from a rising stock price. Every investor and financial institution that holds stock is long those shares. Long can be viewed as the usual state of stock market investing. The term "long stocks" is used primarily as the opposite of short stock positions. A trader who trades both long and short to profit from changes in stock prices uses the two terms to differentiate whether shares were bought or sold to open a trading position.

Short Interest

Short interest is the number of shares of a stock currently sold short by traders. Short interest data can be used by long side investors as well as those who like to trade both long and short. A high level of short interest indicates that a lot of traders think the stock will go down. Also, a high level of short interest can be viewed as buying demand if the traders who have shorted the stock decide to buy back shares to cover their positions. Short interest data is published by the two stock exchanges -- New York Stock Exchange and Nasdaq -- and made available on other financial websites.

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