Cover means to close out an open position, usually to either lock in profits or limit losses. The term is most commonly used in the context of short selling.
When you short sell, you borrow shares to sell them at a high price with the aim of buying them back at a lower price later. To “cover” in this scenario means to buy back the borrowed shares to return them to the lender, thereby closing the short position.
Covering can also refer to other financial instruments like options and futures. In general, it’s the action taken to eliminate the risk associated with an open position.
« Back to Glossary Index