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 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 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 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.
Simply put, this means you have purchased some stock shares.
If you purchase 200 shares of Osino Resources Corp. (OSI) (a gold exploration company), then you are ‘long 200 shares’.
This is a little trickier to explain and is a more advanced trading strategy.
Let us say you sell 200 shares of Osino Resources Corp. (OSI) before you have bought them. You are then ‘short 200 shares’. As the short investor, you owe the buyer 200 shares at the time of settlement, and you will need to buy those 200 shares in the market when you called upon to deliver.
A trader/investor that is doing this has usually ‘borrowed’ the 200 shares. This loan transaction would be with a brokerage firm and placed in a margin account. The strategy is then that you wait and carefully watch the stock price until it falls. You then buy the reduced value shares and pay the loaning brokerage firm. The challenge is that if the price goes up, the broker might give you a margin call. This is a call for more money because the margin account is running low in funds and has to be returned to its minimum maintenance margin level.
The other long and short
Yes, the fog of terminology continues. You guessed it – long and short have another meaning in trading. If you use option contracts, you will have a long position (buyer) and a short position (option writer). It involves, literally, a gamble between the two parties on predicting the price of a share price. That is a topic for a whole new blog and is definitely something that should be left to specialist traders.
As a business owner trying to make smart investments with extra cash available, it is always advisable to approach investments with caution. Arm yourself with lots of knowledge and leave the fancy footwork deals to the likes of specialist traders sidestepping on the stock exchange trading floor. Learn more financial tips in our range of articles today!