Advanced Diploma of Financial Planning (ADFP) Practice Test

What is referred to when an investor has a long position?

1. The investor benefits from falling stock prices

2. The investor anticipates a decline in market value

3. The investor owns securities with the expectation that prices will rise

4. The investor sells borrowed shares in anticipation of a price drop

The correct answer is: The investor owns securities with the expectation that prices will rise

A long position in investing refers to a situation where an investor buys and owns securities with the expectation that their value will increase over time. This means that the investor believes that the price of the securities will rise, allowing them to sell at a higher price in the future, thus realizing a profit. Owning securities in a long position is a fundamental strategy in investing, as it reflects a bullish outlook on the market or the specific asset. When investors hold long positions, they benefit from price appreciation and may also receive dividends, providing a potential income stream while they hold the investment. The other options describe different investment strategies or positions. For instance, benefiting from falling stock prices indicates a short position, while anticipating a decline in market value also suggests bearish sentiment, which is not characteristic of a long position. Selling borrowed shares in anticipation of a price drop aligns with short selling, which is the opposite of holding a long position.