The Short Version
'Taking a position' means establishing an exposure to a security's future price movement by either buying or selling it. A 'long position' means you've bought a security, so you profit if its price rises. A 'short position' means you've sold a security you don't yet own (usually by borrowing it, as covered later in this guide), so you profit if its price falls. Reversing the trade to end the exposure is called 'squaring off' or 'closing' the position.
Explain It Like I'm 10
Picture two kids at a trading-card show. One kid buys a card for $10, hoping to sell it later for more — that's a 'long' position, since they now own something and want its value to go up. Another kid borrows a card from a friend and sells it for $10 right away, planning to buy an identical one back later for less and return it — that's a 'short' position, since they're betting the value goes down. Either way, until they make the opposite trade to finish the deal, they're said to have an 'open position.'
Step-by-Step Example
- 1 You buy 10 shares at $50 each — you now hold a LONG position worth $500.
- 2 The price rises to $60. You sell your 10 shares, closing (squaring off) the position with a $100 profit.
- 3 On a different stock, you borrow and sell 10 shares at $80 each — you now hold a SHORT position.
- 4 The price falls to $70. You buy 10 shares back and return them, squaring off the short position with a $100 profit.
- 5 Until each position is squared off, it's considered 'open' — meaning your profit or loss keeps changing as the market price moves.
Quick Recap
- ✓ Long position: bought first, profits if price rises, loses if price falls.
- ✓ Short position: sold first (borrowed shares), profits if price falls, loses if price rises.
- ✓ Open position: an exposure that hasn't yet been closed out.
- ✓ Square off: executing the opposite trade to close out an existing position.