What it means
When an investor buys 1,000 shares in a company, that investor is long the shares. The aim is to sell later at a higher price, collect dividends or interest along the way, or simply hold the asset for its long-term value.
The term applies equally to anyone who owns a bond, a house or a barrel of oil as an investment. The risk in a long position is limited to the amount invested, because an asset price cannot fall below zero.
The potential gain has no fixed upper limit, since prices can keep rising. This profile is simpler than a short position, where losses can be unlimited.
Traders also speak of going long in derivatives. A long futures contract is an agreement to buy something at a set price on a future date, and a long call option is the right to buy.
In both cases the holder gains if the price of the underlying asset rises. Companies can be long or short in ordinary business without thinking of it as investing.
An airline that has contracted to buy fuel at a fixed price is long fuel, and a company holding a large foreign currency balance is long that currency. Finance teams track these exposures because a price move can create a gain or a loss that has nothing to do with operations.
Long positions are measured in profit and loss terms by comparing the current price with the purchase price. Costs such as dealing fees, financing charges and taxes reduce the net return.
A position funded with borrowed money is a leveraged long, which magnifies gains and losses. Accounting for long positions depends on the asset and the intent.
Shares held for trading are usually measured at fair value with changes going to profit, while assets held for long-term collection or use may be carried at cost. A reader of the accounts should check the policy, because it decides whether a price move shows up as profit immediately.
In practice
Real-world examples.
Example
A pension fund buys government bonds and holds them for steady income. It is long the bonds. If interest rates rise and bond prices fall, the fund records a loss on the position.
Example
An exporter holds $3,000,000 of euros from a sale and has not yet converted them. The company is long euros. If the euro weakens against its home currency, the value of the balance falls.
Example
A jewellery maker buys 200 ounces of gold for future production. It is long gold and will gain if the price rises before it uses the metal. To protect itself, the company may sell a futures contract to offset part of the position.
Formula
Calculation
Profit or loss on a long position = (Selling price - Purchase price) x Quantity
An investor buys 1,000 shares at $50, for a total cost of 1,000 x 50 = $50,000. The price rises to $58 and the investor sells, receiving 1,000 x 58 = $58,000. The profit is (58 - 50) x 1,000 = $8,000, which is 8,000 / 50,000 = 16% before fees. If the price had fallen to zero, the maximum loss would have been the $50,000 invested.Case study
Seen in the real world.
Wexcombe Biscuits is an illustrative, fictional food manufacturer that buys large amounts of wheat. In the spring, its buyer purchased six months of wheat at a fixed price, which left the company long wheat. When the market price then fell by 12%, the company's competitors bought more cheaply, and Wexcombe's costs looked high.
The finance director explained to the board that the company had effectively taken a market position without meaning to. She proposed a policy that limited how much wheat could be bought forward and required approval for amounts above the limit. The illustrative lesson was that buying ahead can protect against rising prices but leaves the business long if prices fall.
Watch out
Common mistakes.
- Thinking only investors can be long, when any business holding stock, currency or contracts at a fixed price has a long exposure.
- Assuming a long position can only lose a small amount, when a large holding can lose its whole value.
- Ignoring costs such as dealing fees and financing, which reduce the actual return.
Questions
People also ask.
What is the opposite of a long position?
A short position, where the investor sells an asset they do not own, hoping to buy it back later at a lower price.
Can you be long a bond?
Yes, owning a bond is a long position that gains when bond prices rise, which happens when interest rates fall.
What does it mean to be long an option?
It means you hold the option and have the right but not the obligation to buy or sell, with your loss limited to the premium paid.
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