Category: 

What is Net Short?

Article Details
  • Written By: A. Leverkuhn
  • Edited By: Andrew Jones
  • Last Modified Date: 13 November 2016
  • Copyright Protected:
    2003-2016
    Conjecture Corporation
  • Print this Article
Free Widgets for your Site/Blog
Helium is the only element that was discovered in space before it was found on Earth.  more...

December 10 ,  1948 :  The UN adopted the Universal Declaration on Human Rights.  more...

A net short situation in finance is when an investor has more in a short position then he or she has in a long position. Figuring out what net short means requires knowing about how today’s investors use financial instruments to invest in markets. A net short value is the amount that an investor gets by subtracting the value of of his or her long positions from the total value of their short positions.

Long and short term positions are different kinds of investments in a stock or equity. In a long position, someone who is trading this stock buys it regularly through a brokerage, and holds it for an expected increase in value. A short position is a little bit different. In a short position, the investor instead borrows stock with the intention of profiting from an expected lower value in the future. This process of betting on the loss of value in a stock is also called short selling, or just "shorting."

Individual investors might take advantage of combinations of long and short positions to lower their risks while chasing potential gains. Managers of hedge funds and other financial collectives might also use both short and long strategies. That makes a net short position relevant to a lot of portfolios.

Ad

When there is a net short position, the account holder is hoping that the value of the stock falls. An investor can also purchase “options” that only pay off if the stock falls. Some financial experts say that providing these incentives for betting on lower stock values helps to balance the markets. Others believe that short selling is a speculative trading activity can be a negative factor in stock outcomes, and harm the investments of those who are taking long positions.

The Securities and Exchange Commission is in charge of regulating stock markets in the U.S. This group has put some limitations on short selling including an “uptick rule” that limits when some kinds of short selling can occur. Nevertheless, many investors still pursue short selling, where looking at a net short position is crucial for figuring out risk versus reward. When both short and long positions exist, traders and investors can’t make good informed choices without knowing which one has more value than the other, and what the net position is if both are offsetting each other. That’s why some brokerage accounts include helpful features for viewing net short and net long values.

Ad

You might also Like

Recommended

Discuss this Article

Post your comments

Post Anonymously

Login

username
password
forgot password?

Register

username
password
confirm
email