2.2. Investment Strategies

Where an investment objective focuses on a desired outcome, investment strategy is concerned with how to achieve that outcome. While it would be a significant exaggeration to say that there are as many investment strategies as there are investors, it is true that there are many, many potential investment strategies and sub-strategies in the finance world. The following are the most widely followed investment strategies. Many of these strategies may be combined with each other.

Long. Investment strategies may involve taking long or short positions in securities. (Some investors, such as hedge funds, may pursue both strategies simultaneously.) A long position is an investment that profits from an increase in the price of a security. The most common type of long position is simply to own the security. A long position can also take the form of an employee stock option, or some other instrument that grants an ability to purchase the security at a specific price. The more the market value rises above that price, the greater the profit when the instrument is exercised. (Several such instruments are covered in Appendix A.)

Short. By contrast, a short position is an investment that profits from a decline in the price of a security. The most common method of establishing a short position is short selling. Short selling is when an investor believes the price of a stock is going to drop, and tries to profit from this by borrowing shares (usually from a broker-dealer for a fee) and selling them at market price. At some point before the shares must be returned, the investor buys back the same number of shares, again at market price, and returns those shares to the lender. If the market price falls in between selling the borrowed shares and buying them back, the investor gets to pocket the difference. If the investor makes more than the fee the broker-dealer charged for lending the shares, the investor turns a profit.

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