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| Short Covering |
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Purchasing securities in order to close an open short position. This is done by buying the same type and number of securities that were sold short. Most often, traders cover their shorts whenever they speculate that the securities will rise. In order to make a profit, a short seller must cover the shorts by purchasing the security below the original selling price.
Also referred to as "buy to cover" or "buyback".
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For example, suppose a trader has sold short 50 shares of ABC stock at a price of $10 per share because he speculated that ABC will not be successful in the near future. Unfortunately for the trader, the company has been very lucky recently and its price rises to $15 per share. In order to limit his losses, this trader decides to cover his short position by buying back the 50 short sold shares at a price of $15 per share.
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