Definition
A long position refers to the ownership of a security or financial instrument (e.g., stocks, commodities, currencies, or derivatives) with the expectation that its price will increase over time, allowing the investor to sell it at a profit. Holding a long position means the investor is “bullish” on the asset, anticipating its value will appreciate.
Examples
Stock Investment
An investor purchases 100 shares of Company XYZ at $50 per share. If the price of the shares increases to $70, the investor can sell the shares for a profit of $20 per share, minus any transaction costs.
Commodity Trading
A trader buys 100 barrels of crude oil at $60 per barrel with the expectation that the price will rise to $80. If the price does indeed increase, the trader can sell the barrels at the higher price, realizing a profit.
Forex Market
An investor buys 10,000 Euros with the expectation that the Euro will strengthen against the US Dollar. If the Euro appreciates in value relative to the Dollar, the investor can convert the Euros back to Dollars at a more favorable exchange rate.
FAQs
What does it mean to hold a long position?
Holding a long position means that an investor owns an asset, expecting its value to increase over time. The ultimate goal is to sell the asset at a higher price than it was purchased for, hence making a profit.
How is a long position different from a short position?
A long position involves purchasing an asset now, with the expectation that its price will rise in the future. By contrast, a short position involves borrowing and selling an asset now, with the hope of buying it back at a lower price in the future to make a profit from the price decline.
Why would an investor take a long position?
An investor takes a long position when they have a positive outlook on the asset’s future performance and believe its price will increase, potentially providing a profitable return on investment.
Can long positions be taken in options?
Yes, long positions can be taken in options. For example, buying a call option entails having a long position in the underlying asset, betting that its price will go up before the option’s expiry date.
What are the risks of holding a long position?
The primary risk is that the price of the asset may decline instead of rising, leading to potential losses. Other risks include market volatility, interest rate changes, and economic events that could negatively impact the asset’s price.
Related Terms
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Short Position: A financial position that involves selling a borrowed asset with the expectation of buying it back at a lower price.
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Call Option: A derivative contract that gives the holder the right, but not the obligation, to buy an asset at a specified price before a certain date.
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Bull Market: A market condition where prices are rising or expected to rise, often leading to increased investor confidence and long positions.
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Derivative: A financial instrument whose value is derived from the value of an underlying asset.
Online References
- Investopedia - Long Position
- Financial Times Lexicon - Long Position
- The Balance - Long Position Investing
Suggested Books for Further Studies
- “Options, Futures, and Other Derivatives” by John C. Hull
- “The Intelligent Investor” by Benjamin Graham
- “A Random Walk Down Wall Street” by Burton G. Malkiel
- “Market Wizards” by Jack D. Schwager
Accounting Basics: “Long Position” Fundamentals Quiz
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