Finance · 21 July 2021

What do ‘long’ and ‘short’ mean in finance?

What do ‘long’ and ‘short’ mean in finance?

The finance markets are awash with terminology and ‘finance speak’. Two basis points means two per cent, for example. It would make investing and trading a lot easier if the terminology alone was not a barrier to entry. Therefore, we are here to help!

If you come across the terms ‘long’ and ‘short’, you may wonder what exactly they mean in the finance world. Well, firstly, it depends if you are looking at investments or at the stock exchange. Yes, we see your eye roll. Let’s look at these words in reference to investments first.

The long and short in investments

Long and short are called temporalities and can be long, short, or medium-term. The term is your performance objective measured against event timings, i.e. your investment date and project disinvestment date. They come with a set of advantages and disadvantages.

Short-term

Short-term can be as brief as an hour, or it could be one week. This would be trading, not investing, and some traders, also known as scalpers, trade within 15 minutes. These are highly skilled professional moves based on deep market knowledge and many years of experience.

The advantage is that the traders get rapid returns on investment. The disadvantage is that it is time-intensive, needs an astute eye, and transactions are costly. As you can imagine, it is also highly stressful.

Medium-term

Medium-term can be as brief as one week or up to several months. This is now in the investment category. You can do basic, infrequent monitoring of this investment or do technical monitoring whereby you will look at the performance once a day.

The advantage of this temporality is that you don’t need to be a specialist, solely dedicated to monitoring it because trends can inform you, and it is significantly less stressful. You will have time to play golf, work, and watch your investment.

Its disadvantages are that you must spend more time upfront in selecting the asset versus a short-term deal, and the investment is subject to the broader economic effects at a macro and micro level.

Long-term

Long-term can be as brief as one year or up to several years. You will manage these investments like a portfolio manager, and if you want to be technical, you can view the performances weekly or monthly.

Dedicated portfolio managers would give you these best practice recommendations:

  • Choose companies that you truly understand as your target investment. This is the top tip as it gives you better prediction results. If you are looking at startups, it is vital that you do large, time-consuming amounts of research about the industry and directly talk with the people involved.
  • Choose companies that you trust. You choose the potential in the above best practice tip, and now you look at their historical performance and business ethics.
  • Choose investment platforms that have fail-safes if you are dabbling in startups. A fail-safe protects investors against losses if your chosen company defaults or the funding goal is not reached. Look for platforms that have stringent company vetting procedures rather than platforms promoted by investors.
  • Only invest what you don’t need. This is not a new rule, and it has degrees of application. Losses happen, so don’t invest any critical money in a high-risk vehicle, e.g. equity crowdfunding. Investing is a type of gambling, so it is irresponsible to use your bread and butter money.
The advantages of long-term investing are an almost zero presence of stress, a minimal time commitment (after your choice research), low transaction fees, and an exciting high return on investment potential. You can also invest larger capital amounts but diversify it, so the risk is lower. This type of investment can be undertaken by most people individually, or you can use a portfolio manager.

The disadvantages are that you need to leave the money untouched for a longer period in order to reach the investment objectives, you need to do significant research, and the longer the term is, the harder it is to predict the outcome.

The long and short in trading

These terms mean something completely different when used in relation to stock exchange trading. It is important to know their meanings and usage, so let’s have a high-level look at them.

Long positions

Simply put, this means you have purchased some stock shares.


 
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