Lesson 5 of 8 · All lessons in this module
- What the financial system does, and what makes it work well
- Classifying assets and markets: securities, pooled vehicles, currencies, commodities and real assets
- Contracts: forwards, futures, swaps, options and insurance
- Financial intermediaries and the services they provide
- Long, short and leveraged positions: leverage ratio, margin return and margin callsVideo lesson
- Orders: execution, validity and clearing instructionsVideo lesson
- Integrated cases: a leveraged loss, a hedge with a floor and a stop-limit buy
- Primary markets, secondary markets and how trades are arranged
Lesson 5 of 8 · 15 min
Long, short and leveraged positions: leverage ratio, margin return and margin calls
A long position gains when prices rise, a short position when they fall; borrowing to buy multiplies both gains and losses by the leverage ratio, and the maintenance margin sets the price at which the broker calls for more equity.
In short
- Long: you own the asset or contract; gains unlimited, losses capped at 100%. Short: you sold what you do not own; gains capped at 100%, losses unlimited.
- Long a put = short exposure to the underlying; short a put = long exposure.
- Short sellers borrow securities, pay payments-in-lieu of dividends, and leave the sale proceeds as collateral, earning a short rebate rate.
- Leverage ratio = position value ÷ equity; maximum = 1 ÷ initial margin. Equity return ≈ leverage × asset return (before interest, dividends, commissions).
- Margin-call price for a long margin purchase: .
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