What’s the Difference Between Long Selling and Short Selling?

You hear on the news that there’s a surplus of oil in the market. Analysts are predicting that the excess in supply will decrease the price of crude oil. You’re pretty sure it’s going to drop, and you want to profit from that insight. To benefit from the price drop a trader would open a short position – in this case, Crude. That’s in essence what short selling is. It’s a trading strategy that rewards traders when the price of an asset drops. That drop means a profit if you’ve opened a short position.

Once you do open a short position, three things can happen:

• The price will rise – and you will need to close out at a loss
• The price will go sideways – and you would perhaps break even
• The price will fall – and you have the potential to make a profit

The goal here is to benefit from your prediction that the price of crude oil in the market is going to go down. If it does, you win. If it doesn’t you break even or lose.

Short selling in the forex market is less straightforward. Each currency quote is a ‘two-sided transaction’, you’re buying one currency and selling the other with every trade. So, when you short sell a currency pair, you’re selling the base currency and buying the quoted currency with the expectation that the value of the currency pair will fall.

Let’s take an example. You know there is rising uncertainty in Europe and you believe the Euro (EUR) will be negatively affected. In this scenario, you would go short on the EUR. On the other hand, you believe that the US dollar (USD) has the potential to gain some ground. So you would go long on the USD.

Your technical analysis is showing you the EUR has been on a long-term downtrend. If the EUR/USD continues to fall in value, your short position will be in profit, and you can close the position by buying back the EUR.

“Going long” can have multiple meanings depending on the context it’s used in. The investor buys an asset with the expectation that the price is going to rise.

You can establish long positions in securities such as stocks, mutual funds, or currencies, or even in derivatives such as options and futures.

Most traders prefer to go long and capture the upward movement of prices especially if they prefer trading in stocks. The buy and hold strategy spare investors from having to watch the market or time their trades. They’re not beholden to the market’s ups and downs, as the stock market has proven to appreciate over time.

A significant difference between long selling and short selling is in the ownership of the asset you’re trading. Short selling is selling an asset that you don’t own, but you’ve ‘borrowed’ with the expectation of selling it and then repurchasing it at a lower price. You do this because you see that you have the potential for profiting should the asset fall in price. Long selling is about selling the asset that you own, having purchased it with the expectation that it will increase in value. In contrast, the short position on an options contract does not own the stock or other underlying asset.