In trading, there are two approaches: long (when an investor buys an asset expecting growth) and short (when a trader sells borrowed assets, hoping to buy them back cheaper in the future). Although shorting can be profitable, longing has several advantages in the long term.
1. Maximum loss in shorting is 100%, while profit in longing is unlimited
The main mathematical advantage of longing is that the asset can grow infinitely, while the decline is limited to 100%.
If the asset is worth 100% of the initial price, in longing it can increase by 200%, 500%, or even 1000%.
In shorting, the maximum profit is 100% (if the asset depreciates to zero). But if the price suddenly rises by 200% or 500%, the short trader's losses become infinitely large (since he will have to buy back the asset at a higher price than he sold it).
2. Markets grow in the long term
Historically, stock markets tend to rise. For example, the S&P 500 index has grown by thousands of percent over the past decades despite crises. This is attributed to economic development, inflation, and company profit growth.
Shorting requires not only accurate predictions of declines but also their timing. Long-term market growth makes betting against it dangerous.
3. Risks when shorting are higher
Shorting can lead to unlimited losses. For example:
If the asset rises by 200%, the short trader loses 200% of the initial amount.
If the asset rises by 500%, the losses amount to 500%.
With a 1000% increase, a short trader loses 10 times the invested amount.
In longing, the maximum loss is 100% (if the asset depreciates).
4. Additional costs of shorting
When opening a short position, the trader borrows the asset, pays interest for its use, and may face a margin call if the price suddenly rises.
Conclusion
Longing is a safer and more profitable strategy in the long term. It limits losses but does not limit profits. In shorting, the situation is the opposite: profit is limited while losses can be enormous.