Short Covering
A short seller buying back borrowed stock to repay it — when this buying crowds in, it can push the price up and lead to a short squeeze.
In plain terms
Short selling borrows stock to sell first, so it ends only when you buy the same stock back to repay it. This "buying back to repay" action is short covering.
Covering when the price has fallen buys back cheap and locks in profit; covering when it has risen buys back dear and locks in loss. It is the closing stage of a short.
What it tells you
Short covering is itself "buying back (a buy)," so when it crowds in at once it becomes a force pushing the price up. So even a short that bet on a fall can, in its closing (covering), create a short-term rise.
When the price starts rising in a heavily shorted stock, short covering to cut losses can crowd in a chain reaction and spread into a short squeeze (a spike).
Formula
short covering = buying back, in the market, the stock borrowed and sold short, in order to repay it (the closing stage of a short — where the profit/loss is locked in)
What high or low means
When the price suddenly rises with no clear good news, part of that rise may come from short covering (buying back shorts). It is a rise of a different nature from fundamental improvement.
A rise from short covering loses momentum once the buy-to-repay quantity is exhausted, so it often does not last long.
Do not mistake a spike from short covering for "the company got better." This is a rise made by supply and demand (buying back), not improved results. Distinguish the cause of the rise.
The timing and scale of short covering are hard to predict. Betting on the assumption "lots of shorts, so it will soon rise on covering" is risky.
Short-selling and short-covering data are separate market data. This term is background for understanding market news.
Metrics to read alongside
See it in real stocks
Search US stocks on Stocklore to see Short and other financial metrics alongside the sector average.
This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.