Understanding Long and Short

Many beginning traders have a problem with getting their heads around being “short” in a market. Let’s first deal with being “long”:

Let’s say you have no position in the FTSE. You decide that the market is going up. You place an upbet with your spread betting firm. You now have a “long” position, since you own a position that you could sell. It is akin to a grain merchant who buys wheat from a farmer. The farmer is “long” wheat and after the trade, the merchant is now long the wheat. All pretty straightforward.

Now, let’s say you have no position in the FTSE and decide the market is headed lower and wish to profit from your forecast. You would then place a downbet with your firm. You do not ‘own’ anything, and in order to cancel out your bet, you will need to buy the FTSE at some stage. You were short the FTSE and after buying, you are flat (no position).

It is the reverse of our normal experience of purchasing first and selling later.

If you still have a problem with it, imagine you are a magazine publisher and sell annual subscriptions. When you attract a customer, you are selling your magazines for the next year (which haven’t been produced yet) and taking the money upfront. You are “short” your magazines, and the customer is “long”, as he/she will be receiving the magazines and could then re-sell them.

Luckily, the online trading platforms of spread betting firms give you a simple either/or choice – are you buying or selling? A simple click on one or the other will give you a trade position. The only thing you need to know is: If you are short and the price declines, you gain. If the price rises, you lose. And vice versa for being long.