Long and short: do you know this stock strategy?
Understand how the long and short investment strategy works
Announcements
Long and short is an investment strategy that requires a lot of analysis and certain care.
In January 2022, the number of individual investors on the Brazilian Stock Exchange (B3) exceeded R$1.45 million.
However, before making any type of investment, it is important to understand how it works, the risks involved and its main characteristics.
With that in mind, in today’s article, we’ll talk more about the stock strategy known as long and short. Enjoy your reading!
What is long and short?
Long and short is a well-known operation on the stock exchange.
This strategy involves simultaneously buying (long) and selling (short) a stock or other financial asset.
In other words, it is the process of acquiring a certain share while selling another share.
The goal is to make a profit from the difference between the price of the two securities. However, the investor will not necessarily make a profit from both the sale and the purchase. It is possible that there will be a loss on one of the two ends.
How does long and short work?
To put the operation into practice, first of all, you need to buy the asset that you believe will have the best performance.
At the same time, it will sell assets that it believes will not perform well.
This is because in the financial market, the price of securities follows a general line.
For example, in 2020, online sales increased significantly. Therefore, the prices of online retail companies, such as Magazine Luiza, rose.
Nonetheless, it is entirely possible that distortions in the market, cause the value of a given company's shares to not follow the expected trend.
But the distortion, over time, can disappear, causing the price to readjust until it reaches the average value practiced.
And that's when the long and short strategy comes in.
At the same time that the trader goes long, he also follows the shares that followed an unexpected movement, that is, whose value increased more than expected in relation to other financial assets in the market.
It is not necessary for the stock that was bought (long) to rise and the stock that was sold (short) to fall. What is necessary is for the long leg to outperform the short leg.
Therefore, we can say that the gain from the operation is precisely in the distortion of asset behavior, that is, the result of one asset being greater than another (something that commonly happens).
With the difference, it becomes possible to profit.
What are the costs of long and short operations?
The first cost you must take into account in this operation is brokerage.
The brokerage fee It is a fee charged by some banks and brokers for transactions carried out on the stock exchange.
Not all brokers charge this fee. Therefore, it is important to research to see if the broker you have an account with or want to open one charges a brokerage fee.
However, there are also other costs: the emoluments fee and the settlement fee charged by the stock exchange. In addition, there is the cost of renting shares.
As for taxes, these transactions are taxed in the same way as share transactions. In long and short positions, Income Tax is 15%. In swing trade and day trade operations, 20%.
What are the types of long and short operations?
Operations are divided into a few categories:
• Intrasectoral (papers from the same sector): Normally, the companies chosen are those that vary in a similar way. This type of operation is based on the price correlation that two companies in the same sector present in the market.
• Intersectoral (actions from different sectors): Here, assets from different sectors can be used.
• Ordinary (ON) and preferred (PN) shares: In this case, the operation is set up with shares from the same company, but from different categories.
• Subsidiary versus parent company: Some publicly traded companies are controlled by companies that have shares on the stock exchange. Thus, the shares usually have a strong correlation.
How to go long and short?
To carry out this type of operation, you must have an account with a stockbroker.
Log in to your account and access your home broker. Then, define the stock you want to sell (short). Enter the selling price.
Now, enter your collateral for the operation, such as shares, for example. Select the share you want to trade long.
Enter the purchase amount and send the transaction.
By doing this, your long and short strategy will be done.
What are the risks of long and short?
The long and short strategy obviously has certain risks.
One of the main risks is the possibility of financial losses. After all, there are no guarantees of profit.
Some measures to dilute the risks involved in this operation are seeking advice from professionals specialized in the market and using stop loss.
However, it is important for you to know that even with these two measures, long and short continues to be an operation that presents certain risks.
One of the precautions that investors must take when carrying out this type of operation is not to leverage excessively and without control.
What is stop loss?
Stop loss (stop loss) in English, is a type of purchase and sale order, which you program in your broker when investing in the stock market.
The main objective here is to prevent losses on the stock market from occurring without some kind of limit.
In other words, it is a way to prevent you from having uncontrolled losses. Thus, you can create a stop and loss order for when the value of an asset reaches an established loss limit.
Stop loss is generally used in day trading risk management.
Conclusion
The long and short strategy is relatively well known to investors.
However, there are some risks involved, which should be analyzed before you carry out any operation.
To build a solid wealth, the ideal is to study and analyze assets and always focus on the medium and long term.
