Question: Thanks for very interesting and educational webinar. I find them very helpful in managing our SMSF.
I would like to know what ‘short’ and ‘long’ mean with regards to shares. Kindly, explain.
Looking forward to the next webinar.
Answer (By Paul Rickard): Thanks for the question.
Like most industries, there is a lot of jargon in finance – and sometimes we make the mistake of assuming that everyone else is familiar with the jargon. Our apologies.
‘Long’ and ‘short’ are a little like “buy” and “sell” – they are opposites.
If you are “long”, you own it. If I am long 100 shares, I own 100 shares.
“Short” or “short sold” is the exact opposite to “long”. If I am “short” something, I don’t own it – in fact, I have sold something I don’t own. If I am ‘short 100 shares’, I have sold 100 shares I don’t own.
Going ‘long’ means that you profit when the price goes up.
Going ‘short’ means that you profit when the price goes down.
How do you sell something you don’t own? You “borrow” the shares from someone else, and then return the shares to the lender when you buy them back.
So, you:
- Borrow the shares from the lender.
- Sell them in the market at price A.
- Buy the shares back in the market at price B.
- Return the shares to the lender.
If B<A, then you make a profit (less any borrowing costs).
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Charlie Aitken: Come fly with me – a buy on Qantas [1]
- Barrie Dunstan: SMSFs and borrowing – time to get worried? [2]
- Roger Montgomery: Telco sector in focus: is BigAir flying high? [3]
- Tony Negline: On the move: accumulation to pension phase [4]
- Penny Pryor: Buy, sell, hold – what the brokers say [5]