Friday, February 12, 2016

What is Short Covering

In our previous article, we have discussed about what ‘short selling’ is and how can it help you gain profit from the forex market. Today we’ll talk about a new, but very related forex term – short covering.

First of all, what is short covering? Short covering is the act of purchasing back borrowed stock in order to cover existing short positions. Short covering basically refers to the act of buying the exact same security that was borrowed and was initially sold short. 

What Does Short Covering Do For You

With the right knowledge and strategy, short selling can be a profitable strategy to use in financial markets. It works by profiting from the possibility of an impending decline in the security’s price, taking advantage of the difference in the short-sale price and the current price when it was short-covered.

For example, you borrowed 100 shares of Apple in hopes of an upcoming decline in the company’s stock price. You decided to sell the stocks you borrowed for its current price of $10 per share because you believe that the stock’s price will go down soon enough. Soon thereafter, the company released a brand new iPhone, but it didn’t pique the interest of the target market. Because of that, the stock price goes down from $10 to $5 per share. After hearing the news, you decided to buy back 100 shares of Apple for $5 per share in order to purchase back the borrowed stocks that was initially sold for $10 per share (this act is called short covering). After the short covering – you’ll realize that you’ve just made a profit of $500 – excluding the commission and transaction fee.

By properly understanding the world of forex trading and understanding what is forex, earning a substantial amount of profit will be an effortless task for you. Refer to our educational blogs for more information about the foreign exchange market.

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1 comment:

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