Buy To Cover

What is a 'Buy To Cover'

A buy to cover is a buy order made on a stock or other listed security that closes out an existing short position. A short sale involves selling shares of a company that one does not own, as the shares are borrowed and need to be repayed at some point. This order, by buying an equal number of shares as were borrowed, "covers" the sale and the shares can be returned to the original lender of them. The lender will typically be the investor's own broker/dealer but their broker may have had to borrow the shares from a third party.

BREAKING DOWN 'Buy To Cover'

For the investor who has bet on a stock price going down, the hope is to be able to buy the shares back at a lower price than the original short was executed at. There is no timetable for the short investor to follow, so they can wait as long as they wish to repurchase the shares. However, if the stock begins to rise above the price the shares were shorted at, the investors' broker may require them to execute a buy to cover order as part of a margin call. To prevent this from happening, investors should always keep enough buying power in their account to make a "buy to cover" trade based the current market price of the stock.

RELATED TERMS
  1. Short Sale

    A market transaction in which an investor sells borrowed securities ...
  2. Short Covering

    Buying back borrowed securities in order to close an open short ...
  3. Days To Cover

    A measurement of a company's issued shares that are currently ...
  4. Buy The Book

    An order to purchase all shares available in the market for a ...
  5. Short (or Short Position)

    A short position is the sale of a borrowed security, commodity ...
  6. Average Up

    The process of buying additional shares at higher prices. This ...
Related Articles
  1. Investing

    Understanding Short Covering

    Short covering is buying back borrowed securities to close an open short position.
  2. Investing

    Short Selling: What Is Short Selling?

    Investopedia Explains: The fundamentals of short selling and the difference between going long or short on an investment.
  3. Markets

    Short Sales For Market Downturns

    This strategy can help in market downturns, but it's not for inexperienced traders.
  4. Trading

    The Difference Between a Long and Short Position

    Stocks are owned in a long position and owed in a short position.
  5. Investing

    Short Squeeze

    A short squeeze refers to a jump in a stock's price, forcing a large number of short sellers to close their position, which in effect pushes the price even higher. When an investor shorts a stock, ...
  6. Investing

    The Basics Of Short Selling

    Short sellers enable the markets to function smoothly by providing liquidity, and also serve as a restraining influence on investors’ over-exuberance.
  7. Markets

    The 5 Most Shorted NYSE Stocks (VALE, CHK)

    Understand what a short sale is and why people would want to initiate a short strategy. Learn about the top five most shorted stocks on the NYSE.
  8. Trading

    Prices Plunging? Buy A Put!

    Investors can make money on a falling stock by going long on a put.
  9. Investing

    Short Selling: The Risks

    Now that we've introduced short selling, let's make one thing clear: shorting is risky. Actually, we'll rephrase that. Shorting is very, very risky. It's not unlike running with ...
  10. Trading

    Short Interest: What It Tells Us

    A stock’s short interest is the total number of shares that investors have sold short but have yet to close.
RELATED FAQS
  1. When short selling a stock, how long does a short seller have before covering?

    There are no general rules regarding how long a short sale can last before being closed out. A short sale is a transaction ... Read Answer >>
  2. What happens when the lender of the borrowed shares in a short sale transaction wants ...

    In a short sale transaction, shares are borrowed from the lender by the short seller and sold in the market. The lender of ... Read Answer >>
  3. Under what circumstances is short selling advisable?

    Find out when short selling a stock is profitable and what an investor should keep in mind before deciding to pursue a short ... Read Answer >>
  4. How long can a trader keep a short position?

    Learn whether there are any limitations on how long may an investor hold a short position, and explore the costs associated ... Read Answer >>
  5. How is it possible to trade on a stock you don't own, as is done in short selling?

    Understand how the process of short selling allows a person to sell a stock he or she doesn't technically own by borrowing ... Read Answer >>
  6. Why does my broker allow me to enter only day orders for short selling?

    Put simply, brokerage firms restrict short sales to day orders because of the complexity of the short sale transaction and ... Read Answer >>
Hot Definitions
  1. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  2. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  3. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  4. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  5. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  6. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
Trading Center