Everyone has heard the old adage “Buy low and sell high.” When a trader buys a stock, he is said to have a “long” position. He is “long” because he believes the stock price is going higher. This is also known as being “Bullish” or a ‘Bull” on the market.
Conversely, a trader can also make money when he thinks a stock is going to decrease in price. Instead of buying low and selling high, a trader can “Sell high and buy low.” In this instance, a broker will actually loan the trader shares of stock that the trader then sells. At this point, the trader has “sold short” the stock and believes the price is going to be lower. This is also known as being “Bearish” or a ‘Bear” on the market. When the price has fallen, the trader buys the stock at a lower price and “covers” his “short” position. The trader then takes the shares that he just bought and returns them to the broker from whom he borrowed the shares.