Long and short positions in SGX stocks are a form of speculation. They allow the traders to take advantage of stock price volatility. A long position is simply the purchase of an asset with the expectation that the asset’s price will rise in the future. When you are long an asset, you hope to sell it at a higher price than what you paid for it.
On the other hand, a short position is the sale of an asset with the expectation that the asset’s price will fall in the future. When you are short an asset, you hope to repurchase it at a lower price than what you sold it for.
How to engage in long and short positions
A trader can engage in long or short positions through futures contracts or forward contracts, call options or put options.
Futures contracts
When you invest in a futures contract, two parties agree to transact on an asset at a future date at a quoted price. The benefit of using this method is that it allows investors to fix the asset’s price they need today for future delivery while participating in market upswings with limited downside risk because of how the futures markets function.
Forward contracts
They are similar to a futures contract, but it involves two parties contracting to buy/sell an asset for settlement at a specific date in the future. The critical difference between a forward and futures contract is that forwards are over-the-counter (OTC) contracts, whereas futures are traded on an exchange. OTC contracts tend to have more tailor-made features and are less standardized than futures contracts.
Call options
A call option gives its owner the right, but not the obligation, to buy a stock at a specific price within a particular time. If you are bullish on a specific stock for the long term and are looking to purchase it in the future at a lower cost, then buying call options would be an ideal strategy.
Put options
A put option gives the option owner the right to sell a stock at a specific price within a particular time. If you are bearish on a particular stock for the long term and are looking to sell it in the future at a higher cost, then buying put options would be an ideal strategy.
Risks of taking a long position
Let’s look at some of the risks of taking a long position.
The stock may not increase in value
You buy stocks at a specific price and hope that it goes up by the time you sell them so that you can make a profit. However, if they don’t increase in value, you will lose your investment.
The stock may decrease in value
The stocks you bought rise in value, but they might decrease in value by the time you want to sell them. This would end up with you losing money instead of gaining money.
Fees and taxes
When trading, fees and taxes need to be considered as they can affect how much profit is made from investing.
Risks of taking a short position
Let’s look at some of the risks of taking a short position.
You may not find any shares to borrow
When borrowing stocks to sell short, you need to find somebody to lend you their shares. If you can’t find any shares to borrow, you won’t be able to take a short position.
The stock may increase in value
If the stock increases in value, you will have to repurchase the stocks at a higher price than you sold them, resulting in a loss.
Fees and taxes
Like taking long positions, fees and taxes need to be considered when trading.
Conclusion
As you can see, there are several benefits of using long and short positions in SGX. If you want to know more about how CFD trading works, we recommend contacting a reputable online broker from Saxo Bank and signing up for a demo account to practise your trading strategies.
