Long Position Meaning: Advantages and Risks

A long position is buying and holding a security or derivative asset, expecting its value to increase over time. Investors take long positions on financial instruments like stocks, bonds, commodities, and currencies when confident their prices will increase, allowing them to sell the assets and realize a profit.

Taking a long position is a popular forex trading terminology in stock trading, options trading, and Forex trading.

Stock traders initiate long trades when they expect the company’s share prices to rise. Options traders take long positions when they believe the underlying asset of the call options will increase in value. Forex traders take a long position on a currency pair when they believe that the value of one currency will appreciate against the other.

Investors profit when a long position appreciates in value, increasing the asset’s price.

A long position in trading works through a buy-and-hold strategy. An investor buys an asset, like a stock or commodity, then holds the asset for a variable period, anticipating its price will increase. The investor closes the long position by selling the asset and pocketing the profit if it appreciates to a desired level.

Opening a long position indicates that the investor assumes the underlying asset is undervalued and is likely to increase in value. Long positions taken at the right time enable investors and traders to profit when the undervalued asset’s price rises.

The following example illustrates the mechanics of a long position in trading. In 1988, Warren Buffet acquired 23 million shares of Coca-Cola stock at $2.45 per share, investing $57.7 million. As of 2024, Coca-Cola shares are trading at $63.03 per share, increasing the value of Buffet’s 23 million shares to approximately $1.5 billion. Although Buffet does not possess $1.5 billion in liquid cash, he can realize this amount by selling the shares and closing his long position.

Making a profit from a long position may look different for some investors depending on the type of long position they open.

The different types of long positions are listed below.

• Long stock position: A long stock position involves purchasing shares of a company at the market price, expecting their value to increase over time. Investors own shares and are entitled to benefits, such as dividends and voting rights, by holding a long stock position in a company. A long position generates profits through capital appreciation when the stock price rises and through dividends paid by the company.
• Long options position: A long options position can be long call options or long put options. Traders establish a long call position by purchasing a call option, granting them the right, but not the obligation, to buy the underlying asset at a specified price before the option expires. Profit is generated if the asset’s price exceeds the strike price plus the premium paid. A long put position is established by purchasing a put option, granting the trader the right, but not the obligation, to sell the underlying asset at a specified price before the option expires, anticipating a decrease in its price. Profit is made if the asset’s price falls below the strike price minus the premium paid.
• Long futures position: A long futures position involves entering into a futures contract to buy financial assets, such as commodities (e.g., oil, wheat, soybeans), indices, or stocks, at a predetermined price on a specified future date. Investors take this position expecting the asset’s price to rise by the contract’s expiration. Profit is generated if the market price at expiration exceeds the contract price, allowing the investor to buy the asset at the lower contracted price and sell at the higher market price.
• Long Forex position: A long Forex position involves buying the “base currency” in a currency pair, with the expectation that its value will appreciate, while simultaneously selling the “quote currency,” expecting it to depreciate. A long Forex position reflects a bet on the base currency’s strength relative to the quote currency. Profit is generated if the base currency appreciates against the quote currency, allowing the investor to sell it at a higher price than the purchase price.

Holding long positions is important for traders and investors because it allows them to benefit from potential price increases in their assets, reduces transaction costs, and helps in portfolio diversification.

Most growth securities, such as stocks, bonds, commodities, and currencies, do not have an upward ceiling on their rise. Traders and investors using the buy-and-hold investment strategy can generate returns if they buy securities low and hold the positions long enough.

Holding long positions helps reduce the frequency of buying and selling transactions for traders. This results in fewer commissions and fees, lowering long-term costs and making the strategy more attractive. The Charles Schwab 2020 annual report showed that investors with higher long-term holdings tend to have better returns due to lower costs.

The buy-and-hold strategy aligns perfectly with other popular investment strategies, such as value investing, growth investing, and income investing.

Value investors seek undervalued assets with solid fundamentals and open long positions to hold for a long time, waiting for the market to correct the undervaluation. A value investing strategy can yield significant returns when the market finally realizes the investment’s intrinsic value. Returns from a value investing strategy can be greater than a growth investing strategy by 4-5% per annum, according to the study “Value Style Investing Versus Growth Style Investing” by Mitchell Miller and Dale Prondzinski of Davenport University.

Growth investors focus on companies exhibiting signs of above-average earnings growth even if the stock appears overvalued in traditional metrics. Long positions on growth stocks tend to be volatile in the short term but can capture massive gains as the company expands and increases its market share.

Holding long positions on income-generating assets like bonds or dividend-paying stocks provides regular income to investors and benefits them from capital appreciation over time.

The eight steps to execute trades using a long position strategy are listed below.

1. Choose a broker: Choose a regulated and reputable broker, then open an account and deposit capital.
2. Research and select assets: Analyze different assets by combining technical and fundamental analysis to identify assets with potential for long-term appreciation.
3. Size the positions: Calculate the size of each open position based on risk tolerance and the overall size of the portfolio, and avoid over-allocating to a single asset.
4. Place the long order: Execute the trade at the current market price or place limit and stop orders based on a risk-return analysis.
5. Adjust the stop-loss orders: Place stop-loss orders to automatically sell the asset if its price falls to a certain level, limiting potential losses, or use trailing stop-loss orders that adjust with the asset’s price movement.
6. Hedge the position: Consider hedging strategies, like opening a put option order to mitigate the risks of long positions.
7. Diversify the portfolio: Open more positions on other assets to mitigate risk and diversify the portfolio.
8. Stick to the plan: Stick to the predetermined strategy and avoid making emotional and impulsive decisions. Maintaining the long-term perspective is a key principle of investing in long positions.

The principles of investing in long positions are listed below.

• Thorough research and analysis: Investors prioritize research using fundamental and technical analysis to identify undervalued assets with high growth potential. Fundamental analysis helps investors evaluate financial statements, reports, and economic factors to determine an asset’s value, while technical analysis helps them determine market patterns and trends.
• Long-term perspective: Investors consider the impact of long-term goals in long positions as they allow the investor to ride out heavy market fluctuations and counter short-term volatility.
• Diversification for risk management: Investing in long positions allows investors to spread their risk in multiple baskets and asset classes to mitigate risk and enhance long-term returns. Investors balance growth, value, and income-generating assets to achieve a balanced risk-return profile.
• Understanding market conditions: Short-term trading attracts heavy price fluctuations as volatility changes due to different factors like news releases or geopolitical events. Investors understand the market conditions before taking a long position to avoid getting wrecked by unpredictable volatility.
• Regular monitoring and balancing: Investors constantly review their portfolio performance against the desired goal or benchmarks and periodically adjust it if it deviates from the target.
• Risk tolerance and management: Investors understand their overall risk tolerance, especially with high-risk investments, which might offer higher returns but can lead to significant losses. A correct long position strategy always includes the use of stop losses to prevent excessive losses.
• Behavioral discipline: Investing in long positions demands patience and strict discipline to weather the short-term price fluctuations and the long time it could take for an asset to appreciate.

The difference between a long position and a short position in trading across various markets mainly lies in the predicted direction of the asset’s price movement.

A long position involves buying a financial security and expecting its price to increase, while a short position involves selling a security and anticipating its price decline. The objective of long or short trades is to generate profits from speculating on price changes.

Investors open long positions if they determine an asset is undervalued, so they can buy low and sell high to make a profit. A long investment strategy applies to several markets, including shares, Forex, commodities, and options. Investors open short positions if they deem an asset overvalued, so they sell high and buy back low to make a profit.

Investors and traders must own the asset (or have a contract representing ownership) to open a long position. In contrast, in short positions, the investors borrow from the broker the asset they want to sell.

The advantages of taking a long position in trading scenarios are listed below.

• Potential for unlimited profits: Long positions, in theory, do not have a price limit. A long position can rise indefinitely, equating to more profit potential if the asset’s value keeps increasing.
• Potential for extra income generation: Investors who open long positions in assets like stocks or bonds can earn regular income through dividends and interest payments.
• Reduced trading risk: Long trading limits an investor’s maximum potential loss to their initial investment capital if the price of an asset drops to zero. The risk profile of long trading differs from short positions, which expose investors to unlimited losses since an asset can rise in value indefinitely.
• Tax benefits: Investors may qualify for lower tax rates on their profits if they sell the long positions they have held for more than a year (long-term capital gains).
• Aligns with market history: Historical data shows that most financial markets tend to appreciate. Taking long positions ensures an investor is well placed with the historical trend and can potentially gain from it if they have optimal entry and exit points.

Traders identify optimal entry and exit points when utilizing long positions using a combination of technical analysis tools, including chart patterns (such as double tops and bottoms or head and shoulders patterns), trend analysis tools like trend lines, indicators like Moving Averages, RSI, and MACD, candlestick patterns, and support-resistance levels.

A common strategy traders utilize to determine the best levels to open or close a long position involves combining multiple technical tools. For example, these may include the head-and-shoulders pattern, a 50-day moving average, and support or resistance levels integrated into their trading strategies to enhance decision-making accuracy.

Experienced traders also consider other factors, such as macroeconomic conditions, company fundamentals, and risk tolerance, when deciding how to enter a long position in different financial markets.

The factors influencing the decision to enter a long position in different financial markets are listed below.

• Economic conditions: Investors look at economic indicators like the inflation rate, interest rate, GDP growth rate, and unemployment data to determine if entering a long is the best decision for a particular asset.
• Company fundamentals: Traders and investors analyze companies’ financial health, growth prospects, earning reports, and industry performance to decide whether to open a long position in a stock.
• Risk tolerance: Risk-averse investors prefer to open long positions in low-risk assets like bonds or stable companies rather than riskier start-ups and high-growth assets.
• Market sentiment: Market sentiment reflects the prevailing attitude of investors towards a particular market or asset, influencing the opening of long positions. Positive market sentiment often indicates bullish expectations among investors. Positive sentiment may arise from favorable economic indicators, strong corporate earnings, or positive geopolitical developments. Conversely, negative market sentiment suggests bearish expectations, potentially deterring long positions.
• Political and regulatory environment: Investors examine government policies, political stability, and market regulations to determine whether they are favorable for generating profits through a long position.

The process of generating profits through a long position trade involves buying a security asset, holding it until its value appreciates, and finally selling it. The difference between the lower buying price and the higher selling price becomes the investor’s profit.

Traders and investors generate high profits when they time the markets correctly. Traders use technical analysis tools like chart patterns and fundamental analysis to determine the lowest price to buy the asset and the highest price to sell it.

Traders generate higher profits if they purchase more shares or asset units, which could result in heavier losses if the market goes against the long position.

A trader or investor’s total profit typically accounts for various costs, including broker commissions and fees, the bid-ask spread, and taxes such as capital gains or dividend taxes imposed by the state or jurisdiction. High commissions, fees, spreads, and taxes can significantly reduce investors’ net profit.

The risks traders should consider when holding a long position in any market are listed below.

• Liquidity risk: Long positions lock up funds for extended periods, which can become problematic if the trader finds other investment opportunities that could yield higher earnings.
• Market decline risk: Traders can lose money if the asset’s price declines in a bear market and the long position is closed at an unfavorable price.
• Company-specific risk: Traders can lose money on their long stock position if a company releases poor earnings reports or a downward estimate revision.
• Inflation risk: Rising inflation reduces the purchasing power of the trader’s money, and stocks and other securities might not keep pace with inflation.
• Political and geopolitical risk: Unforeseen events such as wars, conflicts, tax reforms, and changes in government policies may negatively impact market conditions and asset prices, leading to losses for traders.

Leverage in long-position trading strategies allows traders and investors to open larger position sizes than they could with their capital.

Leverage is a double-edged sword in trading because it amplifies potential profits and losses. For instance, a 1:10 leverage in trading allows a trader to control $10,000 worth of an asset with just $1,000 of their own money. The trader earns a 100% profit on their initial capital with leverage if the asset’s price increases by 10% but only makes a 10% profit on their initial capital without leverage. The same trader loses 100% of their initial capital if they use leverage on a long position, and the price drops by 10%. Traders should be wary of losses when using leverage in trading to hold long positions.

Yes, long positions can be held indefinitely in equity, Forex, and futures markets. In equity and forex markets, long positions can be maintained indefinitely as long as the investor retains ownership and manages any associated costs. In futures markets, long positions can be held indefinitely through periodic rollovers of expiring contracts. In options markets, long positions cannot be held indefinitely due to fixed expiration dates and the lack of a direct rollover mechanism.

Yes, virtually all brokers allow traders and investors to take long positions on various markets, including stocks, bonds, Forex, options, and commodities. The brokers provide different account types, such as cash and margin accounts (for leverage trading), which allow long position trading.

Most of the best Forex brokers for trades offer trading platforms that enable the execution of long positions. Brokers provide different features and requirements to their traders depending on their jurisdiction and policies. Traders should conduct due diligence when choosing a broker to ensure they have a good reputation and are regulated by their local financial authorities.