Investing in the stock market means learning about the different strategies for buying and selling, often called long or short stocks. Each of these approaches has its own features, advantages and risks also.
This is a complete guide which will give you a clear overview on how these strategies work, along with practical examples and step-by-step instructions to help you execute your trades.
Investors can put their money into individual stocks or can buy exchange-traded funds (ETFs). Individual stocks is to own a part of specific companies and ETFs to get broader exposure to different sectors or industries in one investment.
Before diving into the various types of stocks you can buy, it is important to understand the two main directions investors can take in the market, which is going long or going short.
Taking a long stock means buying shares because you believe their price will go up over time. This strategy is considered bullish, aiming to sell the shares later at a higher price for a better profit.
You can open long positions in different types of accounts, such as cash accounts, margin accounts and also IRAs.
Market Outlook: Bullish (expecting prices to rise)
Buying Power Impact:
Cash & IRA Accounts: You pay the full cost of the shares.
Margin Account: Initial Margin: Typically 50% of the stock’s value; Maintenance Margin: Generally 25% of the stock’s value.
Potential Profit: Unlimited, since there is no cap on how high a stock price can go.
Possible Loss: Limited to the total cost of the shares (if the stock drops to zero).
Breakeven: The price you paid per share.
Accounts Used: Cash, margin or IRA accounts.
Also Known As: Equity, stock or shares.
Note: For stocks priced above $5, standard margin requirements apply if your account has margin privileges. Buying on margin typically requires at least $2,000 in marginable equity (cash plus eligible investments).
Check out BHIM Markets Help Center for more on buying power requirements in a margin accounts.
Trade: Buy 100 shares of XYZ at $45.
Cost: $4,500 (paid upfront).
If XYZ rises to $50:
If XYZ drops to $0:
Taking a short position means selling shares that you don’t actually own because you expect their price to fall in future. This is a bearish strategy that lets you buy back the shares later at a lower price, keeping the difference as profit.
Short selling can only be done in a margin account with the right trading permissions and it comes with an added risks and costs.
Market Outlook: Bearish (expecting prices to drop)
Buying Power Impact:
Cash & IRA Accounts: Not allowed.
Margin Account: Initial Margin: Generally 50% of the stock’s value or $10 per share, whichever is higher; Maintenance Margin: Usually 30% of the stock’s value.
Potential Profit: Limited to the initial sale amount (only if the stock price drops to $0).
Possible Loss: Unlimited, since there is no limit to how high a stock price can rise.
Breakeven: The original price at which you sold the shares.
Account Needed: Margin account with full trading privileges.
Also Known As: Short equity, short stock or short shares.
Note: Short selling typically requires at least $2,000 in marginable equity (cash plus eligible positions). Some stocks may have higher margin requirements also.
Selling stock requires a margin account with "The Works" and at least $2,000 in marginable equity (cash and eligible marginable positions).
Trade: Sell short 100 shares of XYZ at $45.
Result: You receive a credit of $4,500.
If XYZ drops to $0:
If XYZ rises above $45:
Open an Investment Account: Start by choosing a brokerage platform that fits your investment style and goals. After that, open an account on the platform.
Fund Your Account: Deposit money into your brokerage account. This gives you the funds needed to buy the stocks or ETFs.
Research Stocks: Look for companies or ETFs that match your investment plan. Take time to study their performance, future prospects, and how they fit into your overall strategy.
Place an Order:
Select the Stock or ETF: Type in the ticker symbol of the asset you want to buy.
Choose the Number of Shares: Decide how many shares you would like to purchase.
Set the Order Type:
Market Order: Buys the stock right away at the current market price.
Limit Order: Buys the stock only if it reaches a price you set.
Review and Submit: Check all the details of your order to make sure everything is correct. Once done, submit the order through your brokerage platform.
Log into Your Investment Account: Sign in to the brokerage account where you hold your stocks or ETFs.
Select the Asset to Sell: From your portfolio, choose the specific stock or ETF you want to sell.
Place an Order:
Choose the Number of Shares: Decide how many shares you would like to sell.
Set the Order Type:
Market Order: Sells your shares right away at the current market price.
Limit Order: Sells your shares only if the price reaches the level you have set.
Review and Submit: Double-check all the details of your sell order to make sure they are correct. Thereafter, submit it through your brokerage platform.
The table below highlights the main differences between taking long and short positions in stocks or ETFs:
| Feature | Long Stock | Short Stock |
|---|---|---|
| Market Outlook | Bullish (expecting the price to rise) | Bearish (expecting the price to fall) |
| How It Works | Buy shares | Sell shares you have borrowed |
| Maximum Profit | Unlimited (price can keep rising) | Limited (only until the price drops to $0) |
| Maximum Loss | Limited to what you paid for the shares | Unlimited (if the price keeps going up) |
| Margin Account Needed | No (can use a cash account) | Yes (requires a margin account) |
| Key Risks | Market drops, company-specific issues | Short squeezes, unlimited losses |
| Buying Power Impact | Pay full cost in cash or IRA; margin lets you use 50% buying power | Needs margin with initial and maintenance requirements |
| Example Trade | Buy 100 shares at $45 Sell at $50 = $500 profit |
Sell 100 shares at $45 Buy back at $40 = $500 profit |
Understand the Risks: Long positions limit your losses to what you invested, while short positions can lead to unlimited losses if the stock price keeps rising.
Know the Margin Rules: Short selling can only be done in a margin account, and you will need enough buying power to meet the initial and ongoing requirements.
Watch Market Trends: Long positions benefit when markets go up, while short positions profit when prices fall.
Consider Taxes: How long you hold your investment affects how it is taxed. Short-term trades often face higher tax rates than long-term investments.
Before making any trades, it is important to fully understand how long and short positions work, the risks involved and also whether these strategies fit with your broader investment goals or not.