Simulator How-To Guide: Covering Short Positions
  1. Simulator How-To Guide: Introduction
  2. Simulator How-To Guide: The User Interface Tabs
  3. Simulator How-To Guide: Purchasing Stocks
  4. Simulator How-To Guide: The Portfolio Summary Page
  5. Simulator How-To Guide: Ticker Symbol Look Up
  6. Simulator How-To Guide: Stock Quote Information
  7. Simulator How-To Guide: Diversified Portfolio
  8. Simulator How-To Guide: Selling Stocks
  9. Simulator How-To Guide: Advanced Trade Types
  10. Simulator How-To Guide: Short Selling
  11. Simulator How-To Guide: Covering Short Positions
  12. Simulator How-To Guide: Cancelling Orders
  13. Simulator How-To Guide: Margin Accounts
  14. Simulator How-To Guide: Buying Options
  15. Simulator How-To Guide: Options Usage
  16. Simulator How-To Guide: Conclusion

Simulator How-To Guide: Covering Short Positions

Regardless of whether your shorted stocks are resulting in gains/losses, you will probably need to cover your position at some point. To begin closing your short position, click on the "Cover" link that corresponds with the short position that you wish to end.


On the following screen, you will see the same "trade stock screen" that you are accustomed to seeing. Note that the Transaction drop-down box is now set to "Buy to Cover".


From here, you can just continue clicking on the "Preview Order" button and the other sequential steps in order to submit the order to the simulator.

Short Sell Implications
Now that you understand how an investor can profit from short sales, let's discuss the inherent risk associated with short selling. An investor profits from short sales as a stock's price decreases, however, a stock's price can never go lower than zero. So there is a limited amount of profit you can earn from a short position in a stock. Conversely, if you take a long position in a stock, your investment can continue to increase in value many times its original cost over a long period of time. There is no theoretical limit to a stock's appreciation.

However, this is of no benefit to an investor when they short a stock. In fact, this unlimited nature of a stock's upward movement means that an investor could theoretically experience unlimited losses if the short sale turns sour. If you are having difficulty understanding this, consider our example short sale of MSFT shares.

Suppose there are two investors interested in MSFT stock, however one decides to buy (go long) 100 MSFT shares and the other shorts 100 MSFT shares. The investor who went long on MSFT can, in the absolute worst-case scenario, lose the entire value of their investment, or $3,500 ($35.00/share multiplied by 100 shares, not including brokerage fees). What can the investor who went short lose?

To answer this question, let us suppose MSFT climbs to $100 per share. The investor who shorted MSFT, who made the same initial investment of $3,500, would lose $6,500 on their investment (or a $65 loss per share multiplied by 100 shares)! In theory, if MSFT continued to perform well the investor's short sale could amount to huge losses from a relatively small investment.

This risky nature of short selling must be assumed (or at least dealt with by offsetting investments) by an investor, and as such is not recommended for novice investors. However, provided an investor understands the risks involved, short selling can be a valuable tool for earning solid returns - even in a bear market.

Simulator How-To Guide: Cancelling Orders

  1. Simulator How-To Guide: Introduction
  2. Simulator How-To Guide: The User Interface Tabs
  3. Simulator How-To Guide: Purchasing Stocks
  4. Simulator How-To Guide: The Portfolio Summary Page
  5. Simulator How-To Guide: Ticker Symbol Look Up
  6. Simulator How-To Guide: Stock Quote Information
  7. Simulator How-To Guide: Diversified Portfolio
  8. Simulator How-To Guide: Selling Stocks
  9. Simulator How-To Guide: Advanced Trade Types
  10. Simulator How-To Guide: Short Selling
  11. Simulator How-To Guide: Covering Short Positions
  12. Simulator How-To Guide: Cancelling Orders
  13. Simulator How-To Guide: Margin Accounts
  14. Simulator How-To Guide: Buying Options
  15. Simulator How-To Guide: Options Usage
  16. Simulator How-To Guide: Conclusion
RELATED TERMS
  1. Short Covering

    Buying back borrowed securities in order to close an open short ...
  2. Short Sale

    A market transaction in which an investor sells borrowed securities ...
  3. Weak Shorts

    Traders or investors who hold a short position in a stock or ...
  4. Cushion Theory

    The theory used when many investors have taken a short position ...
  5. Buy To Cover

    A buy order made on a stock or other listed security that closes ...
  6. Short Interest

    The quantity of stock shares that investors have sold short but ...
RELATED FAQS
  1. How can you lose more money than you invest shorting a stock? If you have no money ...

    The simple answer to this question is that there is no limit to the amount of money you can lose in a short sale. This means ... Read Answer >>
  2. When short selling, how long should you hold on to a short?

    Explore the reasons for short selling and the various factors that influence how long an investor may wish to maintain a ... Read Answer >>
  3. What's the difference between a long and short position in the market?

    Understand long and short positions for stocks and option contracts; combine long and short positions for added leverage ... Read Answer >>
  4. What is the difference between a short squeeze and short covering?

    Learn about short covering and short squeezes, the difference them and what causes short squeezes. Read Answer >>
  5. Please explain what a short seller is on the hook for when he or she shorts a stock ...

    Short selling is hard enough to get your head around without getting into all the particulars. If you have a basic understanding ... Read Answer >>
  6. 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 >>

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