At SmartCapitalMind, we're committed to delivering accurate, trustworthy information. Our expert-authored content is rigorously fact-checked and sourced from credible authorities. Discover how we uphold the highest standards in providing you with reliable knowledge.
Going long means buying and selling financial assets in a manner that makes a profit when the asset price rises. It is arguably the simplest and most common form of investing. It is in contrast to going short, or shorting, which will be profitable if the asset price falls. Going long can be used both in buying assets directly and in using derivatives.
The simplest form of going long is what most people would think of as investing on a market: buying an asset such as a stock and then aiming to sell it later on at a higher price. This creates a profit, subject to the transaction costs involved. With some assets there may be other forms of income from going long, such as dividends on a stock, or coupon payments on a bond.
The contrasting strategy is going short, often known simply as shorting. This involves borrowing an asset such as stocks from another trader and immediately selling it, then buying back the stock later on in order to return it to the lender. In this case the profit relies on the market price falling in the meantime, allowing the lender to buy back the stock for less than he originally sold it for. Some markets have limitations on shorting, designed to prevent excessive downward pressure on prices.
More complicated forms of going long come with derivatives. These are assets that derive their value from another asset. The simplest example is the futures contract, where two investors agree to an asset purchase on a set future date at a fixed price, regardless of the asset's actual price at the time. The person agreeing to buy the asset is known as having the “put” position; the person agreeing to sell the asset is known as having the “call” position. It's possible to sell a position in such a contract before its completion date, which is how the contract becomes an asset in its own right.
With a futures contract, the person with the put position is inherently going long. This is because he will have agreed to buy an asset at a set price, and will thus be more likely to profit if the asset price actually increases by the time the contract comes due. This is because he can pay the agreed price and immediately sell at a profit. To go short in a futures contract, an investor must be in the call position. She will then make money if the price falls as she will be able to buy at the new low price in time to sell at the agreed price to the person in the put position.
When discussing going long and going short in derivatives, it's important to be clear about the context. It's possible to use the terms to refer to the position itself rather than the underlying asset. For example, a trader might go long by buying a call position in the hope of selling it at a profit to another trader before it comes due. In this situation going long means hoping the contract position price will rise, even though for this to happen the underlying asset will usually have to fall.