When it comes to trading, there are a lot of terms and phrases that can be confusing for new investors. One of these terms is "buy to cover." In this post, we'll decode this trading lingo and explain what it means.
When a trader places a "buy to cover" order, they are essentially buying back shares that they previously sold short. "Short selling" is a type of trading strategy where an investor borrows shares of a stock from someone else and sells them on the open market. The idea is that the stock's price will go down, and the trader can then buy the shares back at a lower price, return them to the lender, and pocket the difference as a profit.
However, if the stock's price goes up instead of down, the trader will have to buy the shares back at a higher price in order to return them to the lender. This is where a "buy to cover" order comes in. By placing a buy to cover order, the trader is essentially closing out their short position by buying back the shares they borrowed and sold.
It's important to note that a "buy to cover" order is different from a regular "buy" order. A regular buy order is placed when an investor wants to purchase shares of a stock they believe will increase in value. A buy to cover order is placed when an investor wants to exit a short position they have taken on a stock they believe will decrease in value.
In summary, "buy to cover" is a term used when an investor is closing out a short position by buying back shares they previously sold. It's a way to exit a trade that has not gone in the direction the trader had hoped. By understanding this term, investors can better navigate the world of trading and make more informed decisions about their investments.