A long position in the financial markets represents an acquisition of a security with an expectation that the asset will rise in value. It is the opposite of taking a short position, which is a bet that a security will decline in value, although either strategy can lead to profits. Investors may obtain a long position across several asset classes, including equity, commodities, or currencies.
Acquiring a long position in a stock reflects positive sentiment surrounding a company. Mutual fund managers are a group of investment advisers that widely adhere to a long strategy. These money managers oversee co-mingled funds from multiple investors. They allocate those funds in various asset classes and across multiple regions. Mutual fund managers are paid to preserve and grow wealth over a period of time, and one way to accomplish this is by taking only minimal risks, such as obtaining a long position in stocks or other assets and holding the investment over time.
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A benefit reaped from taking a long position is that an investor cannot lose more than the initial value of the trade, while on the flip side, there is no limit to potential gains. Even if a stock loses all of its value and an investor reaps no profits, other than fees paid to a stock broker he is not on the hook for anything more. This is not the case when going short. A short trade is often layered with leverage, which is debt that is borrowed to increase the chances for a higher reward. If the trade does not pan out as expected, however, the investor must still repay the borrowed funds even if he earned no profits.
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The majority of individual investors take long positions in stocks without balancing that position with a short trade. Shorting is a sophisticated strategy that is widely used by hedge fund managers. By taking a long position in a stock without hedging the investment with a short trade, it is considered a naked position.
In the options market, a trading agreement works similar to a futures contract. Options offer investors the right to take a long or short position, although an agreement carries with it no obligation for an investor to exercise that option. This caveat is what separates options from a futures contract. As the name suggests, an options agreement reflects an option to purchase or sell an asset at a preset price and date. If an investor decides to purchase the asset, he is taking a long position in that options contract.
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