Spread Betting Basics: Going Long, Going Short

Q. What do the terms 'Short Position' and 'Long Position' mean?


A: Traditionally, investors have bought stocks in the hope of profiting from a rise in the price. The view that the price will rise, and the following instruction to buy, is described as 'long' or 'going long'.

A long position is when you purchase something in the belief that the share will move upwards. So you take a LONG position on it i.e. buy it with a view to selling it at a higher price later for a profit.

A short position is the opposite but the intricacies are a bit harder to explain. Basically you take a short position if you believe the price of a share, commodity or index will decrease or go down. You then take a SHORT position on it i.e. sell it with a view to buying it at a lower price later for a gain. In other words here you are effectively mimicking the act of selling securities you do not own in the hope of a fall in price which can later be closed at a profit by buying the shares back at the lower price.

Shorting ('shorting' is also explained more fully in this section - 'What is Shorting?') as a speculative tool is when you have purchased a future or derivative that allows you to benefit from a share falling, or if you borrow shares and then sell them to benefit from a falling price.

Another good simple explanation would be the following. A short position is when a trader gambles that a share price will fall. Investors take a short position by borrowing stock, usually for a modest fee. They then sell the shares on the open market. If they get it right and the price falls, they can buy the shares back at a lower price, return them to the original owner, pay fees and still pocket a profit."

I do believe going short offers great opportunities to private investors, however it is something which needs experience, and a real understanding of the market workings.

If you go... you think that... Opening deal Closing Deal
Long the price will rise Buy Sell
Short the price will fall Sell Buy

How does it work? All spread betting firms will quote a sell (or 'bid') price on stocks. This is the price you would use if you wanted to take a short position. If the share price falls, you would stand to make money. If it goes up, on the other hand, you would lose money. In this way it behaves inversely to a normal long position.

Let's assume Vodafone is currently being quoted at 139p - 140p (139p to sell and 140p to buy) and you believe that Vodafone is about to fall. You decide to sell Vodafone at 139p betting £10 per point. This means you will gain £10 for every point that the price of Vodafone share price falls below this level, likewise you will lose £10 for every point that the Vodafone share price rises above the 139p level -:

Q. Can you really make money in falling markets with a spreadbet?

A: Yes, in fact spread betting comes in very useful if you believe a company's stock price will fall as you can use spread betting to profit from any decline. Now, I do realise that making money on a falling stock sounds like an impossible feat to achieve but just like you can make money by 'buying cheap and selling high', so you can make money by 'selling high and buying low' i.e. selling the shares at a high price and then buying them back at a lower price to make a profit. The practice of profiting from a fall in a company's share price is referred to as 'shorting'.


Let's take a look at the chart of Datacash Group PLC (Public, LON:DATA) over the last 3 months.

- 1. We sell at 250p for £5 per point (each penny being equivalent to a point).

- 2. We set our stop loss at 290p (which is above the highest price Datacash has risen over the previous 6 months.

- 3. We watch as the price falls over the next 6 days and decide to 'Buy' the shares back at 200p.

- 4. Profit from the trade = 250p - 200p = 50 points. So our gains amount to 50 X £5 per point = £250. Since our stop loss was set at 290p, we had to deposit 40pts x £5 = £200 [{i.e. (290p 'stop loss level ' - 250p 'sell price') X £5 per point)}= amount at risk] as margin to open this trade.

That amounts to a £250 profit from a £200 deposit, a return on capital employed of 125%, not bad for a week's trading!!

Q. But how can you sell something which you don't own?

A: A common problem investors have in understanding the concept of shorting. As opposed to conventional share dealing, spread betting allows you to sell first and buy back later with the aim of profiting from a falling price - this is known as 'going short'. But how can you sell something which you don't own?

It might sound a bit odd to sell something you don't own, but situations like this occur all the time in everyday life. Think about Christmas - when you reserve a turkey for your lovely christmas dinner the butcher is selling you something he doesn't yet own. He then only buys it off the farmer much later.

You could think of it another way - you could sell your neighbour's car for a lot of money while he is away on holiday, as long as you can replace it with the same type of car before he comes back (you'd try to sell his car at a higher price than you would buy the replacement).

The exact same thing can happen when shorting. Let's take commodities for instance - you can 'sell' gold by promising to deliver it to your 'customer' in a few months time. When the time arrives you can buy it and pass it straight to the 'customer' - easy!

A spread bet simply takes a view on the direction in which the price moves. i.e. in other words a spread bet is a contract between you and the spread betting provider to exchange the difference in value of a designated instrument such as a share or index when the contract between the two parties closes. The value of this contract is derived from the price of an underlying instrument - at no point do you ever own the underlying security, irrespective of whether you are trading long or short.

 ...Continues here - What is a Point/Pip/Tick?

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