Short vs. Long Bets in Financial Trading

By mosesbet · Filed Under Spread Betting Comments Off on Short vs. Long Bets in Financial Trading 

Short vs. Long Bets

There are two types of bets you can make when spread betting on the FTSE 100 or any other financial market: short and long bets.

Placing a short bet happens when you think the value of the stock or financial index will decrease.  You want to sell the stock now, rather than wait for the value of stock to falls below the spread points losing you profit.

As an example, let’s say you bet on the stock of XYZ losing 5 points from 35.7 to 30.7.  If you’re betting £10 per point, then that would be a loss of £50.  By selling before the price goes down however you manage to dump your stock and get out without losing any money.

Going long, on the other hand, is when you buy stock now or bet on the market moving upwards.  When you think the value of the stock will increase a few points above the spread, then you would buy now and sell later the stock is a few points above the spread and reaches a peak price.

An example of going long is when you think the stock of ABC will increase beyond the offer price.  If the bid price is 150 and you think the index will move up to 155, then by spread betting £10 per point you will make £50 profit.  This is the typical buy low sell high scenario for spread betting/financial trading.

What is Shorting Stock?

Most investors think that to be successful at the stock market or FTSE 100 you should buy low and sell high.  In other words you are “long” on a particular asset or stock. 

You don’t have to do it in that order though.  Shorting stock involves borrowing shares, selling them at their current price in antipation of them dropping, and then buying them back at their low price.  For example, let’s say you borrow 100 shares at 100p, sell them for 100p, and then buy them back again for 50p once they flat in value.  You then return the shares to whomever financial organisation that you borrowed them from, making a profit £50 (the difference).

Shorting stock is a risky plot and does require a certain level of industry knowledge and awareness.  Also, not all brokering houses allow you to borrow shares; however a small number still do. The advantage to shorting stock is that you can make a great deal of profit in a short space of time, without actually owning any of the financial instruments or stock.

Some people are put off by the idea of borrowing or “shorting” stock.  Either they lack ability to make a risk or they’re put off by the smaller intracies of commission and interest rates on the borrowing of shares.  You have to remember when shorting stock and spread betting that the way the trading companies make their money is from the spread – i.e. the difference between the bid and offer price.  If the bid price is 50p, then the offer will be lower say 49p, and the difference or “spread” is in essence the broker’s commission. As such, they’ll have to be a relatively big movement in the market of 2+ pts in order to make serious money from shorting stock.  There are still a few trading companies that charge a small fee instead of making money from the spread however, which you’ll need to look out for.

Be Sociable, Share!