There are different positions that an investor can take in a financial market, with respect to the assets. Some of them are:
1.1. Long Position
It is a position created by a person by buying an asset or purchasing a contract without taking any offsetting position. The above buyer will gain if the price of the asset rises and loses when the prices fall.
1.2. Short Position
a. It is a position taken by the investor by selling an asset that they do not yet own or has written a contract. In a short position, the investor benefits from the decrease in price.
b. When we say that an investor is having a short position, he could be either short on a contract or short on security.
c. When an investor is short on a contract, he must deliver the underlying at a pre-determined date, for a pre-determined price.
d. When an investor is short on security, it means that the investor has sold the securities that he does not own. Here, the brokers arrange the ‘borrow’ and lend them to the investor going short on it, to sell.
e. If the ‘borrow’ cannot be maintained, the seller faces a forced buy-in from the broker.
f. To closes a short position, the seller initiates a ‘buy-to-cover’ or a ‘buy-to-close’ order.
1.3. Forwards
Two parties sign this type of deferred contract, where they agree to buy and sell assets at some point in time in the future under mutually acceptable terms and conditions.
When an investor has a long position in a forward contract, s/he is obligated to take the delivery. Whereas, if an investor has a short position; they are obligated to deliver the underlying asset. And the delivery can be in the form of an asset or cash equivalent.
1.4. Options
Through this type of contract, the buyer buys the right to buy or sell an asset by paying the option premium. But the seller, by getting the option premium takes the obligation to sell or buy the asset at a specified price on or before the predetermined future date.
When an investor goes long on a call option or short on a put option; they benefit from an increase in the price of the underlying asset. However, if the investor takes a short position on a call option or a long position on a put option; they benefit from a drop in the price of the underlying asset.
1.5. Swaps
It is an agreement through which a series of exchanges of periodic payments (both interests and principal) is done with the counterparty.
The common position in a swap contract is swapping fixed interest for a floating rate. The party that benefits from the rise in interest rates is considered long.
1.6. Currencies
Currencies are usually traded in pairs, i.e. one currency is usually exchanged for another. Thus, an investor is both long on one currency (the one he is holding) and short on the other (the one that he intends to exchange the previous one for), simultaneously.