Introduction to Short Covering

Short covering is an action that many investors will utilize to help their investment positions. Here are the basics of short covering and what it means to you as an investor.

Short Covering

Short covering involves purchasing shares of a security in order to cancel out a short position. Investors will do this to cover their losses and minimize the impact of a poor investment decision.

Example

Let's say that you decide to short sell shares of stock in a particular corporation. When you make this decision, the price of the stock is at $100 per share. You believe that the price will go down significantly from that mark. However, after you short sell the shares, the price of the shares goes up. Eventually, you see that the price of the stock went up to $200 per share. At this point, you believe that the price of the stock will continue to go up even further. You would then purchase shares at the $200 price in order to offset the effect of going short on the stock. When you do this, you want to purchase the shares at the least expensive price that you can. This will help you minimize the amount of money that you lose overall.

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