How does the effect of a fall in a stock's price on an investor who is long the stock differ from its effect on an investor who has sold the stock short, without owning it?

Both suffer a loss, since each investor has taken a position that commits capital to the same stock

The long investor suffers a loss and the short seller profits, the two exposures running in opposite directions

The long investor suffers a loss, while the short seller is unaffected until the shares have to be delivered

The long investor's loss is deferred until the sale, while the short seller profits only once the price recovers

An investor buys one hundred shares at fifty dollars a share in a cash account. What are the most the investor can lose and the most the investor can gain on the holding?

A loss of $5,000 if the stock falls to zero; a gain with no theoretical limit

A loss of $5,000 if the stock falls to zero; a gain capped at $5,000 if it doubles

A loss with no theoretical limit as the price climbs; a gain capped at $5,000

A loss of $2,500, half the cost; a gain with no theoretical limit as it rises

Two investors are bullish on the same company: one buys its common shares and the other buys call options on them. What does the shareholder hold that the call holder does not?

The right to buy further shares at a fixed price up to and including an expiration date

Entitlement to dividends, votes on corporate matters and any liquidating distribution

A fixed dividend paid ahead of any dividend on the company's other classes of shares

Protection from loss on a winding up, the shares being repaid ahead of the creditors

An investor pays a premium of three for a put with a strike price of forty. By expiration the stock has risen to seventy. What is the investor's result per share on the put?

A loss of thirty: the amount by which the stock finished above the strike

A loss of thirty-three: the thirty above the strike plus the three of premium

A loss of three: the premium paid, the put lapsing unexercised

A loss with no limit, growing for every dollar the stock climbs above forty

An investor holds shares bought at sixty dollars and buys a put with a strike price of fifty-five for a premium of two dollars, as insurance against a decline. However far the stock falls before expiration, what is the most the combined position can lose per share?

Two dollars: the premium alone, since the put covers every dollar of any decline in the shares

Sixty-two dollars: the shares can still fall all the way to zero, plus the premium paid for the put

Five dollars: the fall to the strike, the two-dollar premium being refunded to the holder on exercise

Seven dollars: the five down to the strike, plus the two paid for the put

An investor buys a put option expecting the underlying stock to fall. Why is the investor described as long the put rather than short it?

The investor bought the put and holds the right it confers, rather than having written it

The position is never long, as long describes a view that the underlying price will rise

The investor intends to hold the put until expiration rather than trade it before then

The investor also owns the underlying shares, which the put is being used to protect

One investor holds a call option and another is long a futures contract, each on the same commodity at an agreed price of eighty. On the expiration and delivery date the market price is seventy-two and both positions are still open. What is the position of each?

Both may decline to buy at eighty, each losing no more than the amount it paid to enter the position

The call holder may let the option lapse; the futures long is bound to buy at eighty

Both are bound to buy at eighty, since each holds a contract to purchase the commodity at that price

The futures long may decline delivery and walk away; the call holder is bound to buy at eighty

An investor who is long a crude oil futures contract wants to close the position out before the delivery date. What transaction does so?

Buy a second identical contract before delivery, which cancels out the first one

Exercise the contract early, buying at the market price instead of the futures price

Sell the same contract before the delivery date, offsetting the long position

Return the contract to the exchange for a refund of the futures price already paid

An investor holds shares in a cash account and is also long a futures contract. During one day both prices rise. How is each gain treated at the close?

The share gain is credited to the account at the close; the futures gain waits for delivery

Both gains are credited in cash at the close, every long position being revalued daily

Both gains stay unrealised until each position is sold, closed out or taken to delivery

The futures gain is credited to the margin account that day; the share gain stays unrealised

What is meant by the holding period of a long position?

The time between the purchase of the security and its later sale

The time between the trade date and the date on which the trade settles

The minimum time a security must be held before the investor may sell it

The time the shares stay in the broker's custody after they have been sold

An investor opens a long stock position in a cash account. How much of the purchase price must the investor pay?

Half the price, the broker lending the other half

The full purchase price of the shares

A quarter of the price, held as equity in the account

Nothing until the position is later sold

A customer who owns 500 shares of a stock enters an order to sell 300 of them. How must the broker-dealer mark the order under Regulation SHO?

Short, because the order reduces the customer's position

Short exempt, because the customer keeps part of the holding

Long, because the customer owns the shares being sold

Not at all, because the sale is smaller than the shares owned

An investor buys 100 shares at $80, receives dividends of $2 a share while holding them, and sells at $74. What is the result of the position?

A net loss of $600, or seven and a half percent of the $8,000 invested

A net loss of $800, or ten percent of the $8,000 invested

A net gain of $200, or two and a half percent of the $8,000 invested

A net loss of $400, or five percent of the $8,000 invested

How are voting rights on common stock usually allocated among holders?

One vote per share, so a larger holding carries more votes

One vote per shareholder, however many shares that holder happens to own

Votes in proportion to the dividends each holder received over the year

Votes for holders of five percent or more, with smaller holders voting through them

An investor sells two long positions at a gain: one held for fourteen months, the other for ten months. How is each gain generally taxed?

The first as a short-term gain taxed as ordinary income, the second as a long-term gain at generally lower rates

The first as a long-term gain at generally lower rates, the second as a short-term gain taxed as ordinary income

Both as long-term gains at generally lower rates, since each was held for more than six months

Both as short-term gains taxed as ordinary income, since neither was held for two years or more

An investor sells shares at a loss and buys the same shares back twenty days later. What happens to the loss for tax purposes?

It is allowed in full, because the repurchase came after the sale

It is disallowed and lost for good, with no adjustment to the new shares

It is allowed, but may be used against gains on the same shares alone

It is disallowed and added to the cost basis of the shares bought back

An investor sells a long position at a gain inside an individual retirement account. How is the sale generally treated for tax at that time?

It is generally not taxed at the time of the sale

It is generally taxed at once, the tax being deducted from the account

It is generally taxed at once, but at half the rate that would otherwise apply

It is generally taxed at once unless the proceeds are reinvested within the year

An investor buys $14,000 of stock on margin, depositing $7,000 and borrowing $7,000. The stock later becomes worthless. Where does the investor stand?

She has lost the $7,000 deposited, and the loan is cancelled along with the stock

She has lost the $7,000 deposited and still owes the $7,000 loan plus interest

She has lost $14,000 in all, but owes nothing further, the broker bearing the loan

She has lost $3,500, half her deposit, the broker sharing the loss on the stock

While an investor's short position in a stock is open, the company pays a dividend. What must the short seller do?

Pay the lender an amount equal to the dividend on the borrowed shares

Nothing, the dividend being paid to whoever bought the shares from her

Receive the dividend herself, as the shares were sold in her own name

Pay the dividend to the company, which then cancels it on those shares

In what kind of account must an investor hold a short stock position?

Any account, once the shares have been borrowed

What does a stock's short interest measure?

The interest a short seller pays the lender for the use of the borrowed shares

The number of its shares that brokers currently have available to be borrowed

The total number of its shares sold short and not yet bought back

The number of its shares sold short during the most recent trading day alone

An investor buys a corporate bond and holds it. To which pair of risks is that long position exposed?

Interest rate risk and daily mark-to-market risk

Time decay and daily mark-to-market risk

Two investors each buy $10,000 of an exchange-traded fund: one fund holds Treasury bonds, the other technology stocks. How do their long positions compare?

Both are long, but their exposures differ with what each fund holds

Both are long and carry the same exposure, each owning an ETF

Only the stock fund buyer is long; the bond fund buyer is a creditor

Neither is long, since fund shares give no ownership of the holdings

An investor holding one company's stock spreads her money across many securities. How does that affect her company-specific risk and her market-wide risk?

It can reduce the market-wide part but not the company-specific part

It can reduce the company-specific part but not the market-wide part

It can remove both parts, given enough different securities

It can remove neither part, as each security still falls with the rest

Two investors hold long positions of equal value: one in a heavily traded large company, the other in a thinly traded small issue. For which does liquidity risk matter more, and why?

The heavily traded company, as its larger volume can make its price move faster

Both equally, as liquidity risk may depend on position size and not on trading

The thinly traded issue, as selling it may mean accepting a lower price

The thinly traded issue, as its price can stay fixed until another trade takes place

An investor places a stop order to sell a long position. When the stop price is reached, what happens to the order?

It becomes a limit order at the stop price, filling there or at a better price

It is filled at exactly the stop price, which the broker guarantees

It is cancelled unless the price recovers to the stop within the day

It becomes a market order, executed at whatever price is then available

Long Position: Stocks, Options, Futures and Margin

What Is a Long Position?

A long position is an ownership interest in a security, derivative contract, or other financial instrument in which the holder has bought the asset, or entered into a contract to buy it, and stands to benefit from an increase in its value — the most fundamental form of investing, in which capital is committed with the expectation of appreciation, income, or both.

Being long a security means owning it. The long position holder has paid for the security, holds it in their account, and is exposed to both the upside of price appreciation and the downside of price decline. The word long describes the holder’s relationship to the instrument — owning it, or holding the right or obligation to buy it — and not necessarily the holder’s view of the market, a distinction that matters in options, where buying a put is a bearish position.

The long position is contrasted with the short position — in which the investor sells a security they do not own, profiting if the price falls and suffering losses if it rises.

How a Long Position Is Opened and Closed

A long position is opened with a purchase and closed with a sale. The investor who has bought a security and not yet sold it is long, and the position stays open until the investor sells. The time between purchase and sale is the holding period, which can last minutes for a day trader or decades for an investor saving for retirement.

When a long position in stock is opened, the trade must be paid for and the shares delivered through settlement. Since 28 May 2024 the standard settlement cycle for most securities transactions in the United States has been one business day after the trade date, known as T+1. In a cash account the investor pays the full purchase price, while in a margin account the investor may borrow part of it, as described below.

When the investor later sells, the order is marked as a long sale. Under Regulation SHO, a broker-dealer must mark every sell order in an equity security as long, short, or short exempt, and an order is marked long when the seller owns the security.

Long Positions in Equities

The simplest long position is the outright purchase of common stock in a cash account.

An investor who buys one hundred shares at fifty dollars per share has established a long position — they own the shares and will profit if the price rises above fifty dollars or suffer a loss if it falls below.

The maximum loss on a fully paid long stock position is one hundred percent of the amount invested — the stock can fall to zero. The maximum gain is theoretically unlimited as the stock price can rise without bound.

Long holders of common stock are owners of the company and are generally entitled to the rights of common stock ownership — dividends when the board of directors declares them, voting rights on corporate matters, and a claim on any assets remaining if the company is wound up.

Return on a Long Equity Position

The return on a long stock position comes from two sources. The first is capital appreciation, the increase in the share price above the purchase price, which becomes a realised capital gain when the position is sold at a higher price, or a capital loss when it is sold at a lower price. The second is income, mainly the dividends the company pays while the investor holds the shares. Together they make up the total return of the position.

Suppose an investor buys one hundred shares at fifty dollars, investing five thousand dollars, and receives dividends of one dollar per share over the following year. If the shares are then sold at sixty dollars, the investor realises a gain of one thousand dollars on the price change plus one hundred dollars of dividends, a total of eleven hundred dollars, or twenty-two percent of the amount invested. If instead the shares are sold at forty-two dollars, the investor realises a loss of eight hundred dollars on the price change, offset by the one hundred dollars of dividends, a net loss of seven hundred dollars, or fourteen percent of the amount invested.

Until the position is sold, the gain or loss is unrealised. It appears in the value of the account, but it generally has no tax effect until the investor sells.

Rights and Limits of Common Stock Ownership

These rights have limits. Dividends are paid at the discretion of the board of directors, so a long position in common stock carries no guarantee of income, and many companies pay none at all. To receive a declared dividend, an investor must own the shares before the ex-dividend date; an investor who buys on or after that date does not receive it. Voting rights usually amount to one vote per share, but some companies issue classes of stock with different voting rights or none. In liquidation, common stockholders rank last: creditors, including those who hold bonds, are paid first, then holders of preferred stock, and common stockholders receive only what remains, which may be nothing.

Tax Treatment of Long Positions

Gains and losses on a long position are generally taxed only when the position is sold. A gain on securities held for more than one year is a long-term capital gain, which is generally taxed at lower rates than ordinary income, while a gain on securities held for one year or less is a short-term capital gain taxed as ordinary income. Capital losses can be used to offset capital gains and, within limits, other income, and an investor may deliberately sell a losing position to realise a loss, a technique known as tax-loss harvesting.

Under the wash sale rule, however, a loss is disallowed for tax purposes if the investor buys the same or a substantially identical security within thirty days before or after the sale, a window of sixty-one days in total. The disallowed loss is instead added to the cost basis of the new position. Positions held inside tax-advantaged retirement accounts, such as an individual retirement account, are generally not taxed on each sale. Tax treatment varies with the investor’s circumstances and changes over time, so investors should consult a tax professional.

Long Positions on Margin

An investor does not have to pay the full price of a long position in cash. Buying securities with borrowed money is known as buying on margin. In a margin account the broker-dealer lends the investor part of the purchase price, and the securities serve as collateral for the loan. Under Regulation T, issued by the Federal Reserve, the initial margin requirement for most securities purchases is fifty percent, so the investor may borrow up to half of the purchase price and pays interest on the loan. After the purchase, FINRA rules require the investor to maintain equity of at least twenty-five percent of the current market value of the long securities, and many firms set a higher requirement. If equity falls below the requirement the firm issues a margin call, and the investor must deposit cash or securities, or the firm may sell securities in the account, without first consulting the investor, to restore the requirement.

Suppose an investor buys ten thousand dollars of stock by depositing five thousand dollars and borrowing five thousand dollars. If the stock rises twenty percent to twelve thousand dollars, the investor’s equity rises to seven thousand dollars, a gain of forty percent on the five thousand dollars deposited, before interest. If the stock falls twenty percent to eight thousand dollars, equity falls to three thousand dollars, a loss of forty percent. A decline to about sixty-six hundred and sixty-seven dollars, roughly thirty-three percent, would reduce equity to twenty-five percent of market value and trigger a margin call at the minimum requirement.

Because the loan must be repaid in full whatever happens to the stock, a long margin position can lose more than the investor deposited. If the stock in this example fell to zero, the investor would lose the five thousand dollars deposited and would still owe the five thousand dollar loan plus interest. This is why the statement that the maximum loss on a long stock position is the amount invested applies to a fully paid position and not to a margin position.

Long Positions in Options

In the options market the term long position has a specific meaning — the investor has purchased the option and holds the right it confers.

A long call gives the holder the right but not the obligation to purchase the underlying security at the strike price before or at expiration. The long call profits when the underlying rises above the strike price plus the premium paid. The maximum loss is the premium paid, and the maximum gain is theoretically unlimited because the price of the underlying can rise without bound.

A long put gives the holder the right but not the obligation to sell the underlying security at the strike price before or at expiration. The long put profits when the underlying falls below the strike price minus the premium paid. The maximum loss is the premium paid, and the maximum gain is the strike price minus the premium, per share, which is reached if the underlying falls to zero.

One listed equity option contract normally covers one hundred shares of the underlying stock, so a premium quoted at three dollars per share costs three hundred dollars per contract.

The word long in options describes ownership of the contract and not a view on the market. A long call is a bullish position, because it profits when the underlying rises, while a long put is a bearish position, because it profits when the underlying falls. Both are long positions because in each case the investor has bought the option and holds the right it confers.

Suppose an investor buys one call contract with a strike price of fifty dollars for a premium of three dollars per share, a total cost of three hundred dollars. The breakeven price at expiration is fifty-three dollars, the strike price plus the premium. If the stock is at sixty dollars at expiration, the call is worth ten dollars per share, or one thousand dollars, a profit of seven hundred dollars. If the stock is at or below fifty dollars at expiration, the call expires worthless and the investor loses the full three hundred dollars.

Suppose another investor buys one put contract with a strike price of fifty dollars for a premium of two dollars and fifty cents per share, a total cost of two hundred and fifty dollars. The breakeven price at expiration is forty-seven dollars and fifty cents, the strike price minus the premium. If the stock is at forty dollars at expiration, the put is worth ten dollars per share, or one thousand dollars, a profit of seven hundred and fifty dollars. If the stock falls to zero, the put is worth five thousand dollars and the profit is four thousand seven hundred and fifty dollars. If the stock is at or above fifty dollars at expiration, the put expires worthless and the investor loses the two hundred and fifty dollar premium.

An option is in the money when exercising it would have value — a call whose strike price is below the market price of the underlying, or a put whose strike price is above it — and out of the money when exercising it would not. The in-the-money amount is the option’s intrinsic value, and the rest of the premium is time value. Because time value erodes as expiration approaches, a long option position loses value over time if the underlying does not move far enough in the investor’s favour, a pattern known as time decay. An investor who is right about the direction of the market can still lose money if the move is too small or comes too late.

The holder of a long option controls whether it is exercised. Equity options are generally American options, which can be exercised at any time up to expiration, while many index options are European-style and can be exercised only at expiration. Long holders usually close their positions by selling the option back into the market before expiration rather than exercising it, and the Options Clearing Corporation stands behind listed options as issuer and guarantor, so the holder does not depend on the credit of the particular investor on the other side of the trade.

Long puts are a widely used form of downside protection — investors who hold long stock positions often purchase puts as portfolio insurance against a significant price decline. A put bought to protect stock the investor already owns is called a protective put. Suppose an investor owns shares bought at fifty dollars and buys a put with a strike price of forty-eight dollars for two dollars per share. However far the stock falls, the most the investor can lose per share is the two dollars between the purchase price and the strike price plus the two dollar premium, a total of four dollars, while the potential gain on the stock remains open, reduced by the cost of the put.

Long Positions in Futures

In the futures market a long position is fundamentally different — it is not a right but an obligation.

The buyer of a futures contract — the long — is obligated to purchase the underlying asset at the futures price on the delivery date unless the position is closed out before delivery through an offsetting sale.

The long futures position profits when the futures price rises above the entry price and loses when it falls — consistent with the general principle that long positions benefit from price appreciation.

However the daily mark-to-market settlement immediately realises gains and losses through the margin account, distinguishing it mechanically from a long equity or long options position.

A futures contract is a standardised agreement, traded on an exchange, to buy or sell a specified quantity of an asset at a set price on a future date. Because each contract covers a fixed quantity, a small change in price produces a large dollar gain or loss. Suppose an investor buys one crude oil futures contract covering one thousand barrels at seventy dollars a barrel. If the futures price rises to seventy-two dollars, the long position gains two thousand dollars, and if it falls to sixty-eight dollars the long position loses two thousand dollars.

Margin in futures works differently from margin on stock. It is not a loan from the broker. It is a good-faith deposit, often called a performance bond, posted to show that the investor can meet the obligation. Each day the clearing house marks the position to the settlement price, crediting gains to the account and debiting losses from it. If the account falls below the maintenance margin level, the investor receives a margin call and must deposit funds to bring the account back up to the required level. A long futures position can lose far more than the margin originally deposited, and if the investor cannot meet a margin call the position can be liquidated, with any remaining deficit still owed to the broker.

Most investors with long futures positions close them before the delivery date by selling an equivalent contract, which cancels the obligation. Contracts that call for physical delivery, such as many commodity contracts, can require a holder who stays long to take delivery of the commodity, while others, such as stock index futures, are settled in cash. Futures on commodities and broad-based indexes are regulated primarily by the Commodity Futures Trading Commission, whereas stock transactions and listed stock options are regulated by the Securities and Exchange Commission.

Long and Short Positions Compared

A short position is the mirror image of a long position. To sell short, an investor borrows the security through a broker-dealer, sells it, and must later buy it back to return it to the lender, profiting if the price has fallen in the meantime. A short seller must hold the position in a margin account and must pay the lender any dividends paid on the borrowed shares while the position is open. The total number of shares sold short and not yet bought back is known as short interest.

The risks are asymmetric. The loss on a fully paid long stock position is limited to the amount invested, while the loss on a short stock position is theoretically unlimited because the share price has no upper limit. Long positions generally benefit in a rising market, often called a bull market, and suffer in a falling or bear market, while short positions benefit in the reverse.

Long Positions in Other Securities

Long positions are not limited to stocks, options, and futures. An investor who buys a bond is long the bond, receives interest and the return of principal at maturity if the issuer does not default, and is exposed to interest rate risk and credit risk. An investor who buys shares of mutual funds or an exchange-traded fund is also long, and the exposure depends on what the fund holds. In every case the investor owns the instrument, pays for it in full or on margin where permitted, and gains or loses as its value changes.

Risks of Long Positions

The most basic risk of a long position is that the price falls. Part of that risk is market risk, which comes from movements affecting the whole market and cannot be removed by diversification, a component also known as systematic risk. The remainder is unsystematic risk, which is specific to an individual company or industry and can be reduced by holding many different securities rather than a concentrated position in one. Liquidity risk is the risk that the holder cannot sell without accepting a lower price, which matters most for thinly traded securities. Long options carry the additional risks of time decay and the loss of the entire premium, and long positions financed with borrowed money or held in futures carry the risk of losses larger than the amount deposited.

Investors manage these risks by sizing a position in proportion to their risk tolerance, spreading holdings across securities and asset classes, and rebalancing when one position grows large relative to the rest of the portfolio. A stop order can set a price at which a long position is sold, although once triggered it becomes a market order and the execution price can differ from the stop price. A protective put sets a defined floor under the position. Each form of protection has a cost, and none removes risk entirely.

Examination Relevance and Key Takeaways

Long positions appear throughout securities licensing examinations, particularly in questions on options, margin, and futures. Candidates for the Securities Industry Essentials examination and the Series 7 examination should be able to identify a long position from a description, state the maximum gain, maximum loss, and breakeven for a long call and a long put, and recognise that a long call is bullish while a long put is bearish. They should also know how the initial and maintenance margin requirements apply to a long margin position, that a long margin position can lose more than the investor deposited, and that futures margin is a performance bond rather than a loan.

The key points to retain are these.

A long position benefits when the value of the instrument held increases. For stocks, calls, and futures that means the price of the underlying rising, and a long put is the exception, gaining value when the price of the underlying falls. The maximum loss on a fully paid long equity position is the full amount invested, and the maximum gain is theoretically unlimited. A long margin position can lose more than the amount the investor deposited.

In options a long position means the investor has purchased the option and holds the right — maximum loss is limited to the premium paid. A long call is bullish and a long put is bearish.

In futures a long position is an obligation to buy at the futures price at delivery — not a right — with gains and losses settled daily through the margin account, and the margin deposit is a performance bond rather than a loan.

The critical distinction across all markets — in equities a long position represents ownership. In options it represents a purchased right. In futures it represents an obligation to buy. In all three contexts the holder of a long position benefits when the value of what is held rises, which for a long put means a fall in the price of the underlying.