BUY TO COVER Meaning and
Definition
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Buy to cover is a financial term that refers to a transaction executed in the stock market or other investment markets. It is specifically related to short selling, which is a strategy used by investors who believe the price of a particular security or asset will decline in the future. When investors engage in short selling, they sell borrowed shares of a stock that they don't actually own, with the intention of repurchasing them at a later time when the price has fallen.
The term "buy to cover" comes into play when the short seller decides to exit the position by repurchasing the borrowed shares. This is done in order to return the shares to the lender, who lent them to the short seller initially. By buying to cover, the investor cancels out their short position and takes advantage of lower prices, profiting from the difference between the initial sale and the subsequent purchase. This allows the short seller to close out the trade and lock in their gains or limit their losses.
The "buy to cover" order is typically executed through a brokerage firm, which matches the short seller with someone willing to sell the shares. It is important to note that the concept of buying to cover is specific to short selling and is not used in other types of regular trading or investing activities.
