Short covering means buying back borrowed securities to close a short position. It allows investors to lock in profits or prevent future loss on short positions.
What is short covering?
The process begins when the investor places a short sale, which means selling a security in hopes that its value will eventually drop. If the price does drop, the investor can issue a buy to cover the transaction, which allows them to lock in a profit on the short position. However, the security being sold may not always drop in price. If the security’s price increases, the investor may issue a buy to cover to prevent future losses on the short position.