Buy to Cover

Buy to Cover

What Does Buy to Cover Mean?

A buy order placed on a stock or another listed security that closes out an existing short position. A short sale involves selling shares of a company that one does not own; since the shares are borrowed, they have to be returned (repaid) at some point. Buying back an equal number of shares that were borrowed “covers” the short sale, and the shares can be returned to the original lender. The lender is typically the investor's own broker-dealer, who in turn may have had to borrow the shares from a third party.

Investopedia explains Buy to Cover

These investors, who bet on a stock price's decline, hope to buy back the shares at a lower price than the price at which the shares were sold short. There is no time frame for short investors, who can wait as long as they wish to repurchase the shares. However, if a stock begins to rise above the price at which the shares were shorted, the investors' broker may force them to execute a buy to cover order to meet a margin call. To avoid margin calls, investors should keep enough buying power in their accounts to make a buy to cover trade, based on the current market price of the stock.

Related Terms:
• Maintenance Margin
• Naked Shorting
• Short (or Short Position)
• Short Covering
• Short Interest