A long position in the financial markets represents an acquisition of a security with an expectation that the asset will rise in value. It is the opposite of taking a short position, which is a bet that a security will decline in value, although either strategy can lead to profits. Investors may obtain a long position across several asset classes, including equity, commodities, or currencies.
Acquiring a long position in a stock reflects positive sentiment surrounding a company. Mutual fund managers are a group of investment advisers that widely adhere to a long strategy. These money managers oversee co-mingled funds from multiple investors. They allocate those funds in various asset classes and across multiple regions. Mutual fund managers are paid to preserve and grow wealth over a period of time, and one way to accomplish this is by taking only minimal risks, such as obtaining a long position in stocks or other assets and holding the investment over time.
A benefit reaped from taking a long position is that an investor cannot lose more than the initial value of the trade, while on the flip side, there is no limit to potential gains. Even if a stock loses all of its value and an investor reaps no profits, other than fees paid to a stock broker he is not on the hook for anything more. This is not the case when going short. A short trade is often layered with leverage, which is debt that is borrowed to increase the chances for a higher reward. If the trade does not pan out as expected, however, the investor must still repay the borrowed funds even if he earned no profits.
The majority of individual investors take long positions in stocks without balancing that position with a short trade. Shorting is a sophisticated strategy that is widely used by hedge fund managers. By taking a long position in a stock without hedging the investment with a short trade, it is considered a naked position.
In the options market, a trading agreement works similar to a futures contract. Options offer investors the right to take a long or short position, although an agreement carries with it no obligation for an investor to exercise that option. This caveat is what separates options from a futures contract. As the name suggests, an options agreement reflects an option to purchase or sell an asset at a preset price and date. If an investor decides to purchase the asset, he is taking a long position in that options contract.