Short position (Short)

A short position is entered into when an investor expects the price of a financial asset to fall. In this way, he earns money from a fall in the price. If the price of a given instrument rises, the investor incurs a loss. In theory, to take a short position is to assume a commitment to sell a given asset at a certain price within a strictly defined period.

Example of a short position

The easiest way to understand what a short position is based on an example:

The investor decides to take a short position in which, he undertakes to sell $10,000 at a rate of 3.80 on a certain date. It turns out that the next day the rate of this currency is 3.75. For this reason, closing the previously opened short position, allows the investor to earn 10,000 * (3.80-3.75), or 500 zlotys, due to the fall in the rate.

What is a short position?

A short position is a commitment to sell an asset at a certain time at a certain price. Buying a contract of this type makes sense when an investor anticipates and wants to cash in on a situation where an asset loses value over time.

Long versus short position in trading?

Short and long positions are opposites in trading. In practice, the conclusion of a contract always requires that its participants are the party taking a long position and a short position. While in the case of a short position the trader makes money if the value of the asset falls, in such a situation the market participant who is in a long position loses.

What is a short position in the forex market?

A short position in the foreign exchange market, is a position in which the investor anticipates a decline in the rate of a currency in the market. In this situation, he commits to sell it in the future, for example, at today’s rate, hoping that at the time of sale it will be lower.

What is a stop loss in a short position?

Stop loss in the case of long and short positions is a tool to consciously manage potential losses and cut too large losses. In the case of a short position, stop loss orders activate when the price of an asset rises too much (contrary to the investor’s expectation that the value would fall).