Long vs Short
Long positions profit when prices rise; short positions profit when they fall. Compare risk, costs and how to go short in stocks, futures, crypto and options.
Every trade takes a side. Going long means buying an asset to profit if its price rises. Going short means selling it, often with borrowed shares or through a derivative, to profit if its price falls. The two look like mirror images, but they are not symmetrical in risk, cost or practicalities. A long position can lose at most what was paid; a short position's losses have no fixed ceiling. This comparison shows the differences and the ways to take each side in different markets.
Side by side#
| Long | Short | |
|---|---|---|
| Profits when | Price rises | Price falls |
| Maximum gain | No fixed cap | Limited to the price falling to zero |
| Maximum loss (unleveraged stock) | The amount invested | No fixed ceiling, since price can keep rising |
| Typical costs | Commissions, financing if leveraged | Borrow fees, dividends paid to the lender, financing. See Borrow Fees and Stock Loan Costs |
| Time pressure | Can hold indefinitely without leverage | Borrow costs and recall risk add pressure |
| Special risks | Gaps down | Short squeezes, recalls, gaps up. See Short Selling |
| Long run market drift | Works with the market's historical upward drift | Works against it |
How to go long or short in each market#
| Market | Long | Short |
|---|---|---|
| Stocks | Buy shares | Borrow and sell shares in a margin account, or buy puts. See Short Selling |
| Futures | Buy a contract | Sell a contract; no borrowing needed. See Futures Trading |
| Forex | Buy the base currency | Sell the base currency; every pair trade is long one currency and short another. See Currency Pairs: Majors, Minors and Exotics |
| Crypto | Buy spot | Short perpetual futures or margin borrow. See Perpetual Futures |
| Options | Buy calls or sell puts | Buy puts or sell calls. See Long Put |
| Prediction markets | Buy Yes shares | Buy No shares, which pay if the event does not happen. See What Are Prediction Markets? |
Short squeezes#
When a heavily shorted asset rises, short sellers buy to cover, which pushes the price higher and forces more covering. Squeezes can be violent, as with Volkswagen in 2008 and GameStop in 2021. Watch short interest, borrow fees and days to cover before shorting crowded names. See Famous Trades in History and Securities Lending and Stock Loan.
Defined risk alternatives to shorting#
| Method | Risk |
|---|---|
| Buy a put option | Limited to the premium paid. See Long Put |
| Bear put spread | Limited, cheaper than a put. See Bear Put Spread |
| Inverse ETF | Limited to the amount invested, but tracking decays over time |
| Buy No shares on a prediction market | Limited to the price paid |
Psychology of each side#
Many traders find shorting harder emotionally: markets tend to fall faster than they rise, rallies against shorts can be sharp, and the long run upward drift of stock markets works against short sellers. Long positions in falling markets bring their own temptation to hold and hope. Clear rules for both sides help. See Discipline and Loss Aversion.
Frequently asked questions#
What is the difference between long and short?#
A long position profits when the price rises; a short position profits when the price falls.
Why is shorting riskier than buying?#
Because a price can rise without a fixed limit, so a short position's potential loss has no ceiling, while a long position can lose at most the amount invested.
How can I bet on a price falling with limited risk?#
Buy put options or put spreads, or in prediction markets buy No shares, where the maximum loss is the price paid.
Next, compare the two biggest derivative types in Futures vs Options.
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Mentioned in
- Visual LibraryReference