Long and short positions: Two choices for investment direction

Risk First: Understand Both Parties’ Bottom Lines

Before starting any transaction, it is essential to understand that the fundamental difference between long and short positions lies in risk exposure. The maximum loss for a long position is the invested capital—if the asset purchased drops to zero, the loss stops there. However, short positions do not have such protection because, in theory, asset prices can rise infinitely, and your losses can also grow without bound. This is a crucial difference to remember before choosing any trading direction.

Long Positions: Betting on Asset Appreciation

The logic behind long positions is straightforward—investors are optimistic about the future prospects of an asset, buy at the current price, and expect to sell at a higher price later, profiting from the price difference.

For example, if you buy 1 Bitcoin for $20,000, expecting its price to rise to $25,000. When the price indeed reaches your target, you can sell your Bitcoin and earn a $5,000 profit (excluding fees and other expenses). This is what a long position looks like in practice.

Short Positions: Betting on Asset Decline

In contrast to long positions, short selling involves investors believing that an asset will decline in value. They borrow the asset from a broker, sell it on the market, and plan to buy it back at a lower price after the decline, returning it to the broker, and pocketing the difference between the sale price and the repurchase price.

For example, with stocks, you borrow 10 shares of a company at $100 per share and sell them, earning $1,000. If the stock price then drops to $80, you buy back the 10 shares at $800, return them to the broker, and keep the $200 profit (excluding related fees).

Comparing Risks of the Two Positions

Long positions have relatively controllable risks—the worst-case scenario is the asset price dropping to zero, resulting in a total loss of your invested principal, but you won’t owe anything to the broker.

Short positions carry unlimited risk. If the market surges sharply, your losses can far exceed the amount borrowed, and you may face endless margin calls.