Going long involves buying a spread bet contract with the expectation that the price of the underlying share or other market instrument is likely to rise.
To go long on any financial market such as stocks or an index means to to buy them. When a spread trader goes long it means the trader expects the price of whatever is bought to go higher and to sell it at a profit. (opposite of going or short selling)
that’ll be the shorter on the left then, and the holy one is long ;o)
- Barclays share is currently trading at 320p and you expect the price of the stock to rise from its present level
- You have £10,000 in your spread betting account. Your spread betting providers will allow you to open a Barclays trade with a 10% initial margin requirement so if you were to utilise the full leverage you would be able to trade a position with notional value of up to £100,000.
- You use a part of your funds to go long at £50 a point at 320p which would be the equivalent position of a 5,000 trade (to get the equivalent trade, simple add two zeros to your stake value). This represents a market exposure of £16,000.
- Each day you leave the position open, you incur a financing cost on the market value of the position (£16,000) to the spread betting provider. The interest rate utilised is usually 2% to 3.5% (varies from provider to provider, obviously the lower the better, for this example we assume interest rate is charged at 2.5%) above the LIBOR (London InterBank Offered Rate) – which is currently at 4% so for a yearly holding period it would cost you 6.5%
- 8 days later, the Barclays stock price has risen and you sell your spread bet at 342p.
- Financing charge 6.5% x 8 x 16,000/360 = (23.11).
- Profit = [(342p – 320p) x £50] – £23.11 = £1076.89
“The natural bias is for people to have an upwards bias so they are more likely to speculate on a rise in the price of a share or index than a fall. However, if the Dow Jones 30 starts to show some cracks, you can always take a short position and make a gain. If there is a windfall move or a full-blown collapse, it’s wonderful if you’re on the correct side.”
The stock market doesn’t always rise and share price are particularly susceptible to severe downward swings, particularly in times of economic crisis. Most stock market investors traditionally didn’t have much choice and had to ride the ups and downs waiting for recovery or sell up and sit on the cash. But spreadbetters have a third option: trying to profit from falling markets.
“Short selling refers to selling shares that you don’t own when you believe the stock price is likely to fall in future. When it does, you buy back the shares at the lower price and pocket the difference. As such it is the opposite of buying shares (referred to as going long), when you gain when the stock price rises and lose when it falls.”
Shorting is where investors and speculators bet on a share price being too high. Thus, ‘Going short’ involves selling a spread bet contract with the expectation that the price of the underlying share or other market instrument is likely to fall. The shares are later bought back at a lower price (at least, that is the theory) and the spread betting contract closed, with the shorter pocketing the difference. In effect when you sell short via a spread bet or CFD you are mimicking the act of selling assets you do not own. If the price were to subsequently fall the spread trade could then be closed at a profit by buying them back at the lower level.
This is in effect the exact opposite of investing in a stock that you expect to rise in value. In practical terms, shorting a market like a stock, index or currency pair is quite easy: every spread betting provider will quote a bid price and an offer price for an instrument. To short the market, you just have to open your spread trade using the bid price. This is the price at the lower end of the spread you are quoted. If the price starts heading down, this should translate in a profit.
- Barclays share is currently trading at 320p and you expect the price of the stock to fall from its present level.
- Your provider will allow you to open a position in Barclays stock with a 10% deposit margin.
- You use a part of your funds to go short at £50 a point at 320p which would be the equivalent position of a 5,000 trade. This is the same as a market exposure of £16,000.
- For each day you hold your open short position, you stand receive a financing credit on the notional value of the position with the interest rate being 2.5% below the London InterBank Bid Rate (LIBID). Given today’s very low interest rates no financing credits are usually applicable.
- 8 days later, the Barclays stock price has fallen and you sell your spread bet at 300p. Profit = (320p – 300p) x £50 = £1000
Note: Be careful with shorting stocks. Remember there is always finite downside (a share price could ‘only’ fall to zero and no further), however if you are wrong, and a market turns against you, the upside is theoretically unlimited (potentially limitless losses).
Cases in Point:
RKH stock last week soared from 40p to 220p. Anyone who was stupid enough to be holding a £100 a point sell bet on RKH at 40p last week who took their eye off the share is now facing a big margin call or if they don’t have spare funds in their account, a bill for 18,000 pounds (220p -40p =180 point move in the wrong direction = 180 x 100 pounds )
If in the event that GKP stock received a takeover offer tomorrow for 3 quid, anyone shorting GKP at £100 a point at 80p would be down 22,000 quid in a flash (220p rise x 100). Anyone with the balls or stupidity to be shorting GKP at 1000 quid a point from 80p would be down 220,000 quid in that scenario.
This doesn’t mean that you shouldn’t consider ‘shorting’ as a tool but you should always include a stop loss at a higher price to cap losses if the market continues moving against you.
“What can make short-selling particularly attractive is that prices in the stock and commodity markets often fall much more quickly than they rise. This is so true that there’s even a Wall Street saying that stocks go up the stairs and come down in the elevator.”