Stock market short covering

Short covering refers to the practice of purchasing securities to cover an open short position. To close out a position, a trader purchases the same number and type of shares that he sold short.

Traders sell a stock short because they believe the stock's price will fall. But if the stock's price goes up, the trader may choose to reduce or eliminate her exposure to a short position.

This process is called short covering. Short covering allows traders to protect themselves against potential losses if the market moves against them. Short covering puts the trader stock market short covering a market neutral position and is a common practice among hedge traders.

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