Start your free trial today and get unlimited access to America's largest dictionary, with:
- More than 250,000 words that aren't in our free dictionary
- Expanded definitions, etymologies, and usage notes
- Advanced search features
- Ad free!
Financial Definition of SHORT COVERING
What It Is
Short covering refers to the practice of purchasing securities to cover an open short position. To close out a position, a trader purchases the same number and type of shares that he sold short.
How It Works
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 It Matters
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.
Seen and Heard
What made you want to look up short covering? Please tell us where you read or heard it (including the quote, if possible).