POFSHORTvsLONGPOSITIONS.docVIP

 FILENAME\p \* MERGEFORMAT E:\OfficeWeb365\OfficeCache\.80\3827724-58ead04abfc55.doc FILENAME\p \* MERGEFORMAT E:\OfficeWeb365\OfficeCache\.80\3827724-58ead04abfc55.doc FILENAME \p \* MERGEFORMAT E:\OfficeWeb365\OfficeCache\.80\3827724-58ead04abfc55.doc 24/12/97 LC  PAGE 3/ NUMPAGES 3 SHORT vs LONG POSITIONS We all know how to make money out of a price increase. If I am confident the price of BP shares is going to rise next week, all I need to do is buy, say, 50, and sell them next week at a profit. The reason this strategy works is because, when the price increase occurs, I have an asset (50 BP) which has risen in value. In the jargon of the financial markets, I am long 50 BP and it is this long position which generates the profit for me. Algebraically, I have a positive holding in my portfolio: +50 BP. Notice, if I am wrong and the price of BP actually falls rather than increases during the week, I lose money. To have a long position in a security whose price falls is obviously bad news. If this all seems very simple, ask yourself the following question: suppose, instead of an increase, I had actually anticipated a price fall in the coming week. How could I make money out of a fall in the price? It turns out that the answer is: simply by reversing the strategy for profiting from a price rise. Instead of buying 50 shares so as to sell them after the price rises, I sell 50 shares first, in the hope of buying them back at the end of the week when the price has fallen. There is a minor complication, however. You may be wondering how I can possibly sell shares I do not own in the first place. In fact, this is achieved simply by borrowing the required shares from a stockbroker for a week. In that way, I create a debt or a liability for myself, denominated not in money terms, but in units of BP stock. In the jargon, I go short 50 BP, selling the shares at the current market price and banking the proceeds. If the price of BP subsequently falls, as I hope