Every trade has its terminologies; this article seeks to explain some of the terminologies essential in the complex realm of the stock market. Among them, there is a basic one – a “long position”.
Through the use of a dictionary approach, this article looks at the meaning, importance, examples, and methods that are surrounded by long positions for individuals that invest and trade.
What Is a Long Position?
A long position is stated as the situation where one buys an asset like a stock in anticipation that its price is going to increase over time.
Buy and hold strategy investors make use of the price appreciation where the actual selling price for the security is greater than the purchase price by the investor.
For instance, let us suppose that you have purchased 100 shares of XYZ Corporation at $50 and you expect the price to go up to $70, then you have a long position. Profit potential means that the amount you stand to gain is the difference between the sale price and purchase price and multiplied by the number of shares and deducting all related costs.
Characteristics of a Long Position
Ownership
- Long position simply means that you own the asset or security that you are trader is holding to enjoy future benefits from it.
Profitability
- There are profits when the asset’s price rises up to the point the position is closed out with a higher price in the market.
Time Horizon
- Long position can be a short-term, medium-term or a long-term depends on the intention of the investors.
Risk Exposure
- The main risk associated with the asset is a risk of loss due to the possibility of the price to fall further.
Why Take a Long Position?
Investors and traders choose long positions for various reasons:
Capital Appreciation
- Long positions are most suitable in cases where the holders require real growth of their investments.
Income Generation
- There are extra returns from a long position in dividend paying stocks.
Market Optimism
- Going long is a term used when an investor believes that the market or an individual asset will rise in future.
Portfolio Diversification
- Longing is mainly used to explain how other positioning modes have less risk when one incorporates positions in different assets.
Examples of Long Positions
Example 1: Individual Stocks
- An investor purchases shares of $100 an ABC Inc for 200 copies when he believes the price will rise to $150. If price rises as envisaged, the unrealized profit is $10,000 [(150 – 100) * 200].
Example 2: Mutual Funds
- Buying shares of stock based mutual fund adoption also make it a long position because the investor believes that the value of the fund will appreciate in future.
Example 3: Long-Term Investing
- DEF Corporation is a long-term investor and buy 50 shares of DEF Corporation at $25 with the intention to hold the investment for next 10 years as the company is expected to record higher returns in the next 10years.
Strategies for Long Positions
Buy and Hold
- A business model where investors acquire whatever they consider valuable and hold it for long – essentially, they pay no attention to short-term market trends.
Growth Investing
- It was specifically investing in stocks, that have potential high growth, this is regardless of its high price that exist in the market.
Value Investing
- Picking those shares that are grossly underpriced based on their earnings and then acting patiently without selling them at the wrong sides of their earnings.
Dividend Investing
- Picking securities that return constant or steady dividend pay-outs apart from possible appreciation in value.
Long Position Risks
Market Risk
- It loses due to price decline within the price changes of the larger market.
Sector Risk
- Certain categories can be down, making individual stocks in that category downturns as well.
Company-Specific Risk
- There are cases where its management is poor, sales decline or if there is any adverse event the price of its stock is affected.
Opportunity Cost
- It is same as in the case of long position, the funds invested can lock up other opportunities in the market.
Managing Long Positions
Effective management of long positions is essential to maximize profits and minimize losses:
Set Entry and Exit Points
- Set the price at which you will be able to either purchase or sell the asset in relation to investment objectives.
Diversify Portfolio
- Diversify investments to minimize the risk in the possible investment assets.
Regular Monitoring
- It becomes easier to track performance and get informed about events that affect the companies in which you invested.
Use Stop-Loss Orders
- Reduce possible large losses or exit by stating a cheap price at which the position can be closed.
Reinvest Profits
- Giving back your gains from your long positions to feed into similar investments for even better returns.
Tools for long position management
Trading Platforms
- There are tools with brokers like Robinhood, E-TRADE, or Fidelity to identify and trade the positions.
Analytics Software
- Sophisticated devices identify key market characteristics and estimate probable fluctuations in prices.
Financial News Sources
- New sources are useful in decision making through providing up to date information in the news.
Conclusion
One of the most basic concepts of investing and trading is the long position, which allows profit opportunities through capital appreciation and dividends.
Knowing how to properly use some strategy nuances in this concept can help investors tap into long positions in reaching their financial goals.
A seasoned trader or a new player in the stock market has to master the art of long position management to succeed in the long run.
FAQs About Long Positions
1. How do economic conditions impact long positions?
Economic growth usually favors long positions, but recessions may be difficult.
2. Is it possible to hold long-term position all the time?
Yes, of course, there is no time line which limits the holding of position for long terms; however this is on the basis of the various objectives of the investor as well as performances of the actual asset.
3. Are long positions are confined to equities alone?
However, long positions are allowed in practically all types of financial assets, whether it is bonds, commodities or even cryptocurrencies.
4. What are the outcomes when the price of an asset is below the price that one used to get it?
There you have an unrealized loss and this becomes a realized loss if you are able to sell the asset at the lower price.
5. Is there a possible for making dividends while holding a long position?
Of course, yes, normally, if an asset pays dividends, you get them when you are long.
6. Is long position appropriate for beginners?
Long positions are less dangerous to short positions and inexperienced investors should consider taking it.
7. In what way does taxes impact on the long positions?
There is a difference in taxes depending on the holding period of the securities. Moreover, long-term position usually has better tax condition than a short-term position in the sense that the taxes that one has to pay is relatively smaller than that of the latter.
8. What is a leveraged long position?
A long position with leverage applies borrowed money to increase the units, thus boosting the odds of profit and risk.