Stock Basics 

What is a stock?

I'm sure you've heard stocks before, but what are stocks exactly?

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A stock is a small portion of a company. In other words, if you buy a stock you are buying a portion of a company. For example, let's say that there's a company that sells grapes. I like grapes and I think other people do as well so I buy 10 shares grape stock. I now own 10 small portions or shares of that company.

 

If the company gains value, then the stock should also gain value. An example of when a stock will gain value is if a new product is released. Or in our example, if a new grape variant sells well. 

 

If the company loses value, then the stock should also loose value. An example of when a stock loses value is if the company sold less items than they thought they would. In our example this could happen if the grape farm experiences a severe drought. Because of this drought, the company can’t harvest and then sell as many grapes as they thought they would. This would lead to a decrease in sales and typically a decrease in company and stock value. 

 

What does it mean to long a stock?

With all of this in mind, it then make sense that, when trading stocks, you will buy shares of companies that you think will gain value. This is an example of longing a stock or entering into a long position. More broadly, entering into a long position means that your investment will gain value as the underlying, or what you are investing in, gains value.

 

Now for an example. Let's say that you think in the next 20 years people are going to buy a lot of phones. A safe bet given how instrumental phones are in our everyday lives. As such you should look for a strongly performing phone company and buy, or long shares of that company's stock.
 

What does it mean to short a stock?

Longing a stock means creating a position where you will gain value if the underlying asset gains value. Similarly, shorting a stock means creating a position that will gain value as the underlying asset loses value. A classic example of entering into a short position is borrowing shares of a stock and then selling these borrowed shares on the market.

 

Eventually, the person who borrowed these shares will have to give them back to the institution that lent them to them. So, if the underlying asset goes down, then the person who borrowed the shares can buy them back for less than they sold them for. In this situation, they will have made money.  However, if the underlying gains value, then the person who bought the stock will have to buy back the shares at a higher price than they sold them for. In this situation, the borrower will have lost money.