Those involved in financial markets love jargon and ‘going long’ is one of the more egregious examples. That is because, for the most part, going ‘long’ is simply normal investing. It means a trader owns an asset and benefits if the price goes up. Easy, right?
Not necessarily. It can get more complicated for options or contracts for difference (CFD) trading when going long means either that the trader owns the option rights or is positioned for a rise in price. In each case, the risk and reward prospects will be slightly different.
How going long works in normal circumstances
If you are ‘long’ Apple shares, that means you own Apple shares. You benefit if they rise and you lose money if they fall. This is in contrast to a short, where you do not own the stock and have to borrow it and then buy back, thereby benefiting from a fall in price.
There are a number of clear advantages with a regular long position like this. Your risk is limited. The price of the asset can only fall to zero and therefore you can’t lose more than your initial investment. This is in notable contrast to a short position where the price can keep rising indefinitely and therefore there is no cap on your potential losses.
Regular long positions have other natural advantages. Market momentum has tended to be in a long investor’s favour. For example, the S&P 500 Index has shown a negative performance in just six of the last 20 years. This will, of course, vary for different assets and it’s important to keep in mind that past performance is not a guide to future performance.
Holding an asset ‘long’ will also entitle you to dividend payments where these are made. Not all assets pay a dividend but, as an example, the dividend yield for the FTSE All Share is currently 4.5%. A regular long position has this natural tailwind, while any short position has to clear a hurdle rate.
Equally, holding a regular long position is generally straightforward. You don’t have to worry about margin calls, the availability of stock to short or the ongoing costs of open positions. In this way, monitoring a long position is less nail-biting than monitoring a short position. On the basis that your losses are limited, you don’t have to be watching the news every day in case there’s a surprise takeover or innovative product launch that sends the shares soaring.
Spread-betting and CFD trading
‘Going long’ has a slightly different meaning in the context of spread betting and CFD trading. In most cases, the investor won’t hold the asset, but is positioned for a rise in price. Some traders prefer this to buying the asset because it allows them to trade using leverage. They will pay a fraction of the purchase price to gain the same exposure. This introduces higher risks, but because the investor is going long and the shares can only fall to zero, this is capped.
From a UK perspective there are also certain tax advantages to going long using spread betting or CFD trading. Any profits are not subject to either stamp duty or Capital Gains Tax. On the right platform, it may also be cheaper to take long positions via spread betting or CFDs. However, you won’t get the tailwind of dividend payments because you never actually own the shares.
There are examples when ‘going long’ gets a little more complicated. One such is if you buy a short exchange traded fund (ETF) – sometimes known as an inverse ETF. These types of funds are designed to go up in value when their benchmark falls. Technically, you are long the asset, but you are betting on a fall in the price. You can’t lose more than you put in, so the risk is limited. In this way, the trader is both long and short.
Equally, a long position may mean something slightly different when options trading: buying or holding a call or put option is considered a ‘long’ position. This is because the investor owns the right to buy or sell the asset at a certain price. The seller of the option is considered to be ‘short’ the option, because they have sold the right to buy or sell. This is one area where an investor can be ‘long’ an asset, while also betting on a fall in price.
Investing some time to understand the differences is a good start
As such, while going long can be relatively straightforward, it can also be complicated. There are a number of ways to go long and each will have a different impact on your portfolio.
Whether you plan to go long, short or a mix of both, the Fineco trading platform contains a range of resources including live webinars with industry experts. You can also access everything you need to trade across global markets using Powerdesk, Europe’s most-used trading platform.