Definition
Buy to cover is the transaction used to close a short position. When short sellers want to exit their position, they must repurchase the same number of shares they originally borrowed and sold. The shares are then returned to the lender, closing the short position. Timing this purchase is crucial as buying at a lower price than the short sale results in profit, while buying at a higher price results in a loss.
Example
After shorting 100 shares at $50, you see the stock drop to $35. You buy to cover 100 shares at $35, closing your position with a $1,500 gross profit ($50 - $35 = $15 x 100 shares).
FAQ
What is Buy to Cover?
Purchasing shares to close out a short position.
Why is Buy to Cover important?
Buy to Cover helps investors evaluate trading mechanics and make more informed decisions.