Buy To Cover

AAA

DEFINITION of 'Buy To Cover'

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.

INVESTOPEDIA EXPLAINS '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 Selling

    The sale of a security that is not owned by the seller, or that ...
  2. Short Squeeze

    A situation in which a heavily shorted stock or commodity moves ...
  3. Regulation SHO

    A regulation implemented on January 3, 2005 that seeks to update ...
  4. Days To Cover

    A measurement of a company's issued shares that are currently ...
  5. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin ...
  6. Naked Shorting

    The illegal practice of short selling shares that have not been ...
Related Articles
  1. Cut Down Option Risk With Covered Calls
    Options & Futures

    Cut Down Option Risk With Covered Calls

  2. Protect Yourself From Market Loss
    Options & Futures

    Protect Yourself From Market Loss

  3. I want to try short selling, but how ...
    Active Trading Fundamentals

    I want to try short selling, but how ...

  4. What does
    Active Trading Fundamentals

    What does "squeezing the shorts" mean?

comments powered by Disqus
Hot Definitions
  1. Last In, First Out - LIFO

    An asset-management and valuation method that assumes that assets produced or acquired last are the ones that are used, sold ...
  2. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  3. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  4. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  5. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  6. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
Trading Center