In stock trading, traders are familiar with the terms of a long trade and short trade. Those terms refer to whether a trade was started by buying or selling first.
A long trade means a trade is initiated by purchasing first while expecting to sell it at a higher price. On the other hand, a short trade is initiated by selling first, then repurchase the stocks at a lower price.
Long Trades
In a long trade, the trader bought an asset while hoping that the price will go up. They usually say ‘go long’ or ‘going long’ to show their interest in buying a particular asset.
For instance, if a trader goes long on 1,000 shares of ‘XXX’ stock at $10, the transaction costs them $10,000. If they can sell the shares at $10.20, then they will receive $10,200. Thus, the net a $200 profit, minus commissions.
That is the preferred scenario for every trader who is going long. Contrarily, if the stocks drop, they will lose some amount of money, instead.
Once a trader going long, then their potential profit is unlimited because the price of the asset can rise indefinitely.
Short Trades
In short trades, traders sell assets before buying them while hoping that the price will go down.
However, shorting a stock can be confusing for some traders, especially the new ones. The reason for that is in the real world we typically have to buy something to sell it.
While in the financial markets, you can buy and then sell or sell then buy.
Also read: Stock Trading 101: Common Stock vs. Preferred Stock
Similar to the example of traders going long if they go short on 1,000 shares of ‘XXXX’ stock at $10, you receive $10,000 into your account, but this isn’t your money yet.
Your account will show that you have -1,000 shares, and at some point, you must bring that balance back to zero by buying at least 1,000 shares.
If you can buy the shares at $9.60, you will pay $9,600 for the 1,000 shares, so your profit is $400, minus commissions.
