When it comes to understanding the longs and shorts of investing, most novice investors must learn something that seems to be a new language. In fact, the term “long and short” originated in financial markets.
In this article, we discussed several key terms that will help you better understand and communicate with other market participants. These terms are used in stocks, derivatives, futures, commodities, and foreign exchange (or currency) markets. You will learn what buying, selling, and selling really mean to investors, and how they use certain terms interchangeably with more confusing words like bullish and bearish. To make the issue more complicated, option traders added some other terms, such as “contract signing” or “contract for sale.” When you start to communicate more easily about the market, you will get better information and can make smart investment decisions.
Long positions and short positions
The financial market allows you to do some very common things in daily life and some uncommon things. When you buy a car, you own that car. In the stock market (also called the stock market), when you buy a stock, you own the stock. Others say that you are a “long” stock or hold a long position. Whether you are trading futures, currencies or commodities, if you hold a long position, it means you own it and want it to appreciate. To close a long position, you sell it.
To most new investors, shorting may seem a bit strange, because short positions in the stock market are selling stocks that you don’t actually own. Brokerage companies allow speculators to borrow stocks and sell them on the open market, and promise to eventually return the stocks. Then, the investor will sell the stock at the price of the day, hoping to buy it back at a lower price, and at the same time earn the difference. Catalog companies and online retailers use this concept every day to sell products at higher prices and then quickly buy them from suppliers at lower prices. The term originated from a situation where a person tried to pay a bill but was “short” of funds.
You may be interested to know that some people think that short selling is unpatriotic or a “bad form.” “Don’t short the United States” is attributed to John Pierpont Morgan (JP Morgan).The argument against short selling continues to this day.
When trading foreign currencies in the “spot” market (currency and many commodities are traded in the futures or spot market), you usually go long in one currency and short in another. This is because you exchange one currency for another, so various world currencies are traded in pairs.
For example, if you think that the U.S. dollar will rise and the euro will fall, you can go short the euro and go long the U.S. dollar. If you feel that the U.S. dollar will rise and the yen will fall, you can go long for the U.S. dollar and short the yen.
Bullish and bearish
For novice investors, other commonly unfamiliar terms are “bullish” and “bearish.” The term bullish is used to describe a person’s feeling that the market will rise, while bearish is used to describe a person’s belief that the market will fall. The most common way people remember these terms is for bulls to attack by lowering their heads and raising their horns. The bear attacks by sliding its paws down.
Chicago is the home of the commodity and futures markets; coincidentally, the professional basketball team is the Bulls and the professional football team is the Bears. The mascot of the Chicago Cubs is a bear.
It is also common for investors to use “long” or “short” to describe their market sentiment. Investors may say that they are long the market instead of saying that they are bullish. The same downside is that investors may say that they are short in the market instead of using the term bearish. Both of these words are acceptable when describing your market sentiment. It is important to remember that short and long positions usually mean that you have a certain position in any market you are trading, but as you can see, this is not always the case.
Bullish and bearish
The derivatives market is also called the options market. An option is a contract in which one party agrees to buy or sell a certain security (securities is a general term for any financial product) from or to another party at a set price and time. Options are very common in the stock market, but they are also used in the futures and commodity markets. The foreign exchange (or currency) market is known for very creative derivatives, known as “exotic options.”
For our purposes, we will refer to options in the stock market because this is the first introduction to derivatives by most investors.
Options boil down to bullish and bearish.
Call options give the contract buyer the right to buy stocks at a set price on or before a set date. Usually another investor will sell a bullish contract, which means they believe that the stock will stay flat or fall. Those who buy call options are long on the contract, while those who sell the contract are short.
Put options allow the contract buyer to sell stocks at a set price before a set date. Just like a call option, there is usually another investor willing to sell the option contract, which also means that the investor believes that the stock will either stay the same or appreciate. So people who buy option contracts go long contracts, and people who sell contracts go short.
Using derivative dialects to sell options has also become more complicated, because not only do they use the terms “sell” or “short” in the contract, option traders also say that they have “written” a contract. Today, contracts are standardized and no one really “writes” contracts, but the term is still very common.
Guaranteed call options are usually one of the first option strategies that investors learn-these strategies involve both buying stocks and selling call options contracts. The purchased stock acts as “collateral” to prevent the option buyer from exercising the call option, and the seller can abandon the stock while retaining the premium obtained by selling the option. Since investors buy stocks and sell call options at the same time, they use “buy-sell” orders.
At this point, you may find yourself going back and rereading some of the vocabulary just discussed. Let’s review it quickly. Investors either say they are bullish on the market, or they are long, or bearish, or they are short. If we are long one currency in the foreign exchange spot market, we short another currency at the same time. This may be confusing, but not as confusing as the options market.
In the options market, we can say that we call stocks and then short put options, because while calling, we can buy call options or sell put options. We can put stocks and make long puts, because if we are put, we can buy puts or sell call options. This may also mean that we short the market by long put options, or long short positions in the market by short call options. You can imagine the verbal laughter of a group of option buyers when they talk to each other.
In many cases, not just in the financial world, overcoming language barriers will be one of the keys to success. Investment comes with its own language barriers, and these barriers must be broken by translating terminology and suppressing grammar.