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.

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RELATED FAQS
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    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 >>
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