Short Covering
What is Short Covering?
How Does Short Covering Work?
Traders sell a stock short because they believe the stock's price will fall. But if the stock's price goes up, the trader may choose to reduce or eliminate her exposure to a short position. This process is called short covering.
For example, a trader shorts 1,000 shares of XYZ stock at $20 per share, believing the share price will fall. Instead, the price rises to $25 per share. The trader has substantial loss exposure, so she purchases 1,000 XYZ shares at $25 per share to cover her short position.
Why Does Short Covering Matter?
Short covering allows traders to protect themselves against potential losses if the market moves against them. Short covering puts the trader in a market neutral position and is a common practice among hedge traders.
To learn more about short selling, click here to read Shorting Stocks: How to Find the Perfect Candidate for Profits.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
