What is short covering in stocks/trading?
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The basic idea is this –
1) You predict a certain stock is going to lose value very soon.
2) You “buy” the stock from someone with the promise of giving them back the same number of shares in the future.
3) You then sell the stock you bought putting $ into your bank account and you can make other trades/deals.
4) After the time passes you need to go and rebuy the shares you sold and give them back to the person you bought them from. If the stock has indeed lost value it costs you less $ to rebuy them than you earned when you sold them originally, good deal for you. If you were wrong and the stock gained in value, you’re going to lose money because the shares are now more expensive to rebuy than you original earned.
5) “Short covering” is the moment of reckoning when you need to rebuy the shares you sold and give them back the owner.
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