Long Trades vs. Short Trades
A long trade is a trade which purpose is to profit from an increase in the price of a security. A short sale is a transaction aimed at profiting from a decline in the price of a security. Long trades often involve buying stocks and selling them at a profit while short trades involve borrowing stocks and selling them quickly, preferably at a lower price than the original selling price.
How to Complete Trades?
Both long and short trades involve buying and selling a security, although executing a long trade and a short trade requires a bit different process. Going long on a security it is a process that majority of investors are familiar with. Traders buy a security and hold it for a period of time, hoping that the price will rise in the meantime. At some point later, traders sell the security for a profit.
Shorting involves selling a security first. In order to start a short trade, you first need to borrow shares from someone else, e.g. your broker. Then you sell those shares on the market. You receive cash from the sale but owe a debt to whoever lent you the shares.
After that, you need to buy the shares that you borrows and return to your lender to repay your debt. Once you are done with this, you complete the short trade. Ideally, you buy shares at a lower price than you sold the shares you borrowed, so you can keep the difference as a profit.
Which One to Choose: Long Trades vs. Short Trades?
Long and short trades fill two different niches. If you are confident that a stock’s price will rise, go for a long trade. If you believe that it will fall, a short trade will let you profit from that price movement.
For majority of traders will generally choose to go for long trades. They are less risky. You can consider short trades if you are an experienced trader who can handle the high risk.
It is important to have a trading plan as this is the best approach to identify and execute trades, including the conditions you would buy and sell securities.
