Going long

What Is Going Long?

Going long, in finance, refers to the act of purchasing an asset with the expectation that its price will rise over time. This fundamental approach to investing falls under the broad category of Investment strategy. When an investor goes long on an asset, such as a stock, bond, or commodity, they are betting on its future appreciation. The objective is to sell the asset later at a higher price than the purchase price, thereby realizing a profit. This strategy contrasts with short selling, where an investor profits from a decline in an asset's price.

History and Origin

The concept of going long is as old as organized markets themselves, reflecting the foundational principle of buying low and selling high. Early forms of investment can be traced back to the 17th century with the establishment of formal exchanges. The Amsterdam Stock Exchange, founded in 1602, is often cited as a precursor to modern stock exchanges, facilitating the buying and selling of shares in companies like the Dutch East India Company.⁴ Investors would "go long" on these shares, hoping for successful voyages and profitable returns. Over centuries, as financial markets evolved, the practice of taking a long position became the predominant method of investing in equities and other securities, forming the bedrock of wealth accumulation strategies.

Key Takeaways

• Going long involves buying an asset with the expectation that its market value will increase.
• It is the most common and conventional investment strategy, seeking profit from Capital appreciation and potential Dividends.
• Investors who go long benefit from the overall upward trend of markets over extended periods.
• This strategy is generally associated with a lower Risk profile than short selling, as maximum loss is typically limited to the initial investment.

Interpreting Going Long

Interpreting a "long" position is straightforward: it signifies an optimistic outlook on the future performance of an asset. When an investor is "going long," they believe the underlying factors supporting the asset's value—such as strong company fundamentals, favorable economic conditions, or increasing demand—will drive its price higher. This perspective often involves a long-term investment horizon, allowing time for market Volatility to smooth out and for the asset's intrinsic value to be reflected in its market price. A core tenet of successful long-term investing, a strategy synonymous with going long, is often Diversification across various assets to mitigate specific risks.

Hypothetical Example

Consider an investor, Alice, who believes that Tech Innovations Inc. (TII) has strong growth potential due to its new product line. On January 1, she decides to go long on TII stock.

• Step 1: Purchase. Alice buys 100 shares of TII at $50 per share, for a total investment of $5,000.
• Step 2: Hold. Alice holds her shares, confident in her analysis. Over the next six months, TII's new product gains traction, and the company announces positive earnings.
• Step 3: Appreciation. By July 1, the price of TII stock has risen to $65 per share.
• Step 4: Sale and Profit. Alice decides to sell her 100 shares at $65 per share, receiving $6,500. Her profit from going long is $6,500 (sale price) - $5,000 (purchase price) = $1,500, before any transaction costs.

This example illustrates how going long allows an investor to benefit directly from an asset's price increase. She avoided attempting to Market timing the precise ups and downs and instead relied on a longer-term outlook.

Practical Applications

Going long is the most prevalent strategy in various financial markets, including equities, bonds, and commodities. In the Stock market, individuals and institutional investors typically go long on shares of companies they believe will grow or generate consistent income. For instance, pension funds and retirement accounts predominantly employ long-term strategies, holding a diversified portfolio of stocks and bonds for decades. This approach benefits from the general upward trend of equity markets over significant periods. Research indicates that long-term investors possess advantages, such as the capacity to adopt positions where payoff timing is uncertain and the ability to exploit opportunities created by short-term investors.

An³other practical application involves the bond market, where investors buy bonds (lending money) with the expectation of receiving regular interest payments and the return of their principal at maturity. Even in real estate, buying a property with the intent to sell it at a higher price in the future is a form of going long. Regulatory bodies, such as the U.S. Securities and Exchange Commission (SEC), also monitor significant long positions. For example, shareholders who acquire more than 5% of a class of equity securities are required to file beneficial ownership reports on Schedule 13D or 13G, providing transparency on large long positions. Fur²thermore, the decisions made by central banks, such as the Federal Reserve, regarding interest rates can significantly impact the profitability of long positions across various asset classes, as lower rates often make borrowing cheaper and stimulate economic activity, which can support asset prices.

##¹ Limitations and Criticisms

While going long is widely adopted, it is not without its limitations and criticisms. The primary risk is that the asset's price may decline instead of increase, leading to a loss. In the worst-case scenario, the asset's value could fall to zero, resulting in a total loss of the initial investment. Unlike short selling, where theoretical losses can be infinite if the price rises indefinitely, the maximum loss when going long is limited to the amount invested.

One criticism is the inherent exposure to market downturns. Even a generally upward-trending market can experience significant corrections or Bear market phases, which can erode portfolio value, especially if an investor needs to liquidate assets during such periods. Additionally, reliance on Leverage when going long can amplify losses, as borrowing to invest means debt must be repaid regardless of investment performance. Another critique points to the psychological challenge of maintaining a long position during periods of high Volatility or negative news, as emotional reactions can lead to selling at a loss rather than adhering to the long-term strategy.

Going Long vs. Short Selling

The terms "going long" and "Short selling" represent two opposing market positions based on different price expectations.

Confusion often arises because both strategies involve buying and selling, but the order of operations and the underlying market expectation are reversed. Going long is the more intuitive and common approach, where investors aim to buy something and then sell it for more. Short selling, conversely, involves selling something one does not yet own, with the intention of buying it back later at a lower price to return it to the lender, profiting from the decline.

FAQs

What does "long position" mean?

A long position refers to the ownership of an asset, such as a stock or bond, with the anticipation that its value will increase over time. It's the most common form of investment.

Can you go long on anything?

You can go long on a wide range of financial instruments, including stocks, bonds, commodities, currencies, and real estate, as long as there's a market to purchase and hold the asset. The ability to buy and hold implies a long position.

Is going long always a long-term strategy?

While "going long" is often associated with long-term investing, the term technically just means holding a positive amount of an asset. A trader might go long for a few hours or days if they expect a quick price increase. However, the most significant benefits, especially in the stock market, are typically realized over longer periods, leveraging the power of Capital appreciation and compounding.

What happens if an asset's price drops when you are going long?

If an asset's price drops after you've gone long, you will incur an unrealized loss. The loss only becomes realized if you sell the asset at that lower price. Long-term investors often ride out temporary price declines, trusting in the asset's eventual recovery and growth.

How is going long different from investing?

Going long is a specific type of Investment strategy that involves buying an asset with the expectation of its value increasing. Investing is the broader act of committing money to an asset with the expectation of gaining an additional income or profit. Therefore, going long is a form of investing, but not all investing necessarily means "going long" in the context of market positions (e.g., short selling is also a form of investing).