What is Short Covering?

Short covering in the share market refers to the buying back of securities that were initially sold short by investors or traders. When investors short sell a stock, they borrow shares and sell them with the expectation that the price will decline. Short covering occurs when these investors buy back the shares they borrowed to cover their short positions, typically because they believe the price will rise or to minimise potential losses.

Short covering example

For example, if an investor short sells 100 shares of Company XYZ at $50 per share, anticipating a price decline, and the stock price rises to $60 per share, the investor may choose to buy back the shares at the higher price to cover their short position and limit their losses.

Price movements in short positioning

Short covering can lead to rapid price movements in the opposite direction of the original short sale. When a significant number of short sellers cover their positions by buying back shares, it can create upward pressure on the stock price, causing a short squeeze. This can result in further price appreciation as more short sellers rush to cover their positions, exacerbating the upward movement in the stock price.