Lesson 3 of the BUX Homeschooling series is a language lesson. The world of stocks has its own crazy language and two of the most common phrases are ‘long’ and ‘short’. Here’s what they mean and how you can apply them on the BUX app.
You’ll often hear traders say:
“I’m long on Shell,” or “I’m long on gold.” This means the person is investing or speculating on the price of Shell or gold to rise.
You’ll also hear:
“I am short on Tesla.” That person invests or speculates on the idea that the price of Tesla will go down.
Long and short might seem like a strange way to refer to it. But it’s not a million miles away from saying “I’m £100 short” when you’re £100 short on cash. That’s close to the principle of short selling.
Let’s break down these two concepts, starting with the easiest. If you’re long, you think the price of an asset (for example, a share, commodity, or cryptocurrency) will rise. This is the classic idea of investing.
You invest £100 and buy 10 shares of Stock X, with the expectation that it will be worth more in a few months or years.
But what if you don’t think the price will rise at all? There must be money to be made on the stock market this way? Yep, there is. It’s called ‘shorting’.
This is more complicated, but it works like this. We’ll use the same example with Stock X above. This time, the short-seller calls his broker and asks to borrow those 10 shares. The broker says yes, but it will cost a commission and some interest. “Fine” says the short-seller. He borrows the 10 shares and immediately sells them to someone else for £100. He puts the £100 to the side.
Let’s say the short-seller is right. Stock X drops. A month later those shares are only worth £80. This is when the short-seller buys 10 shares on the open market for the lower price of £80. By doing so, he pockets £20. Of course, he still has to pay the broker back with any interest. But let’s say, for example, he still has £15 left. Not bad when he started out with nothing.
Only for the advanced?
This is a very basic explanation of short-selling. But the principle remains the same whether it’s £100 or £100 million. You borrow shares (or some other assets), sell them on, and then buy back at a lower price.
There are obviously a few risk factors here, which means short-selling isn’t for everyone. You’re trading with other people’s shares, you’re aiming for a price drop, and the cost of interest is ticking up the whole time. Quite a lot can go wrong. And when it does, the losses can be significant.
Even many traditional investors stay away from shorting the stock market. Everyone can determine their own moral position.
On BUX Zero, our investment app, anyone can buy, hold, or sell shares. But you can’t speculate on a price drop. With our trading app, BUX X, you can speculate on a price drop. Of course, we have built in the necessary measures to keep it safe and responsible.