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Let’s say you decide to visit a jewelry shop to purchase gold. The reason you decided to purchase gold is because you think that gold prices are going to increase in the future.
So to profit from this perception, you would purchase gold today and sell it later when its prices have reached its peak.
The inverse would be done in case you perceive a fall in price; then you would sell gold at current price to protect yourself from the dip in prices.
This action of buying gold or selling gold with the aim of profiting from a future perception is termed in the stock market as going long or going short.
A person is said to be long on a stock when he buys the stock for his portfolio and aims to profit from it by expecting it to rise in the future and selling it at the elevated price. A person is said to be short on a stock when he expects that the stock price will fall and he would repurchase the security at a lower price by selling it today at an elevated price.
Being long in a stock is similar to being bullish on the stock while one shorts a stock when he has a bearish perception about the stock.
Although shorting a stock comes with various complications such as regulatory restrictions and high capital requirement, going long or short can be done through various financial instruments like equity, commodity and currency
Let’s say you have done your analysis and are bullish about the price of HDFC Bank whereas bearish about the price of Infosys. How can you profit from such a perception?
The simplest method is to buy shares of HDFC and sell shares of Infosys in cash. If your analysis is correct, you profit by selling HDFC shares later at a higher price and buying Infosys shares later at a lower price. There are more nuances to shorting a share, but for simplicity’s sake, this is the gist of it.
Options are another form of derivatives, and provide the investor with much more alternatives such as Call and Put options.
They are risky instruments that must only be dealt with by informed and experienced traders.
To explain them briefly, any investor that buys an option possesses the right (not an obligation) to exercise the same and take delivery or sell the stock at the pre-determined price Known as Strike price.
Whereas any person that sells options is then obligated and must compulsorily deliver or purchase shares at the Strike price in case the buyer chooses to exercise the same.
An investor must be confident about carrying out his own analysis and should then only take a long or a short position in the stock market. Buying or selling shares is a safer option for a basic novice investor than dealing in derivatives.
It must be kept in mind that to go long or short, there must be enough liquidity in the system and also with the investor if dealing in derivatives. In order to take prudent decisions, you must study and measure all the pros or cons before going long or short in any stock.
Thank you for watching the video.
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