Short is an investment that profits from a decline in price.

In the trading world, many people think that profits come only from buying low and waiting for the price to go up. But in reality, shorting is another method that allows you to make profits both when the market rises and falls. Understanding the difference between Long and Short positions is key to helping both novice and experienced investors avoid losses and maximize profit opportunities.

Short is a trading position that profits from a decline in price

To explain short simply, it’s like placing an order to sell a certain asset first, expecting its price to decrease. When the price drops, you buy it back at a lower price to profit from the difference.

Shorting is only applicable to derivative instruments such as futures contracts, CFDs, and other derivatives. It’s not available for all common tools. That’s why many investors rely on CFD platforms to short, as they offer convenience and quick execution.

Long Position means buying to sell higher – profit from rising prices

Now, let’s look at Long positions, which are the opposite of short. A Long position means an investor places an order to buy an asset, expecting its price to go up. When the price reaches the desired level, they close the position by selling.

Using a Long position works well in a bullish market trend. You buy low and sell high. For example, an investor buys 100 shares of PEAR at $350 each. When they hear that the company’s earnings have improved, causing the stock price to rise to $400, they sell all shares and make a profit of $5,000.

But if the market doesn’t go as expected and the price drops to $340, the investor would incur a loss of $1,000 when closing the position.

Short Position means selling first and buying back at a lower price

Unlike Long positions, Short positions involve selling an asset first, even if you don’t own it yet, expecting the price to fall. Then, you buy it back at a lower price to profit.

When you open a Short position, you’re betting that the price will decline. If it does, you buy back at a lower price and close the position for a profit. If the price rises instead, you buy back at a higher price and incur a loss.

Example of using a Short Position in stocks

Suppose an investor hears that the manufacturing country of ORANGE is about to suspend exports, leading them to believe the stock price will fall. They borrow 100 shares of ORANGE from a broker and sell them at $350 each, receiving $35,000.

When the rumor proves true and the stock drops to $300, the investor buys back 100 shares at $300 each, spending $30,000. They return the shares to the broker and close the short position, making a profit of $5,000.

However, if the stock price doesn’t fall but instead rises to $400, the investor must buy back at that higher price, resulting in a loss of $5,000.

What tools are suitable for shorting?

Shorting stocks isn’t easy with regular stocks due to the complicated borrowing process. Today, CFDs make shorting much easier.

CFDs are derivatives that give investors the right to profit from both rising and falling prices, with fast and convenient trading processes. Investors can use leverage to increase potential gains, even with a small capital.

Besides CFDs, shorting can also be done through other instruments like futures contracts on platforms such as Tfex and BlockTrade, or other derivatives.

Summary – Long and Short positions allow you to profit in both directions

For investors looking to increase profit opportunities, understanding how shorting works is essential. Shorting allows you not only to wait for a bullish market but also to profit when the market trends downward.

However, remember that shorting and trading with leverage carry high risks. You can make significant gains, but also face substantial losses. Therefore, risk management and thorough market research are the smartest strategies investors should adopt.