Trading involves buying or selling something with the hope of making a profit. Unlike investing, a trader can generate profit if something increases OR decreases in value.
When we expect something is going to increase in value, we would take a long position.
For example, Casey is a trader who speculates that a company’s stock price is going to INCREASE over the next few weeks.
She decides to take a long position by buying stocks in the company. If the stock price rises, she sells the stocks she bought at the higher price in order to make a profit.
Now, let’s rewind and imagine Casey believes the stock price will DECREASE. This is where things get a little bit more complicated.
Casey enters into a short position by making an agreement with her broker to borrow some stocks for a period of time. Casey then sells those stocks to somebody else, expecting the value of those stocks to fall.
If the stock price DECREASES as she anticipates, she would then buy back the stocks for a lower price and return them to her broker.
As a result, Casey is able to generate a profit by selling the stocks she borrowed at a higher price and repurchasing them at a lower price.
However, if Casey enters a short position and the value of the stocks INCREASE, she is still obligated to return the stocks she borrowed to her broker. In this situation, however, she would be forced to repurchase these stocks at an increased price, leading to a loss.
Engaging in trading activity can be very risky. It involves using multiple sources of market data, information and tools to develop an array of probabilistic price scenarios, (typically over short periods of time) to inform trading decisions.
Most successful traders commit a lot of time and energy to expanding their knowledge and skills. They are often level-headed, emotionally intelligent and can make rapid decisions about their trades under high levels of stress.
Trading is not for everyone, and one of the most common mistakes we see beginners make is engaging in trades without committing the necessary time and energy into self-awareness, knowledge and skill development.