Short (Short Position)

When an investor believes that the value of a stock will decline in the near future, perhaps over the course of a few days or weeks, they adopt a strategy called a short position or short selling. When engaging in short selling, more commonly than not, investors do not own the shares that they are selling. Instead, they borrows those stock shares from their brokerage house and sell to another investor in the open market. A short seller will benefit from their short position as long as the price of that security will continue to move lower. When they are ready to close their short position, they repurchase those shares. This action is called buy-to-cover. Basically they buy back the same number of shares they were originally selling, giving back to their broker the shares they borrowed and closing their short position. As complicated as it might sound, this is a simple and automated process that takes place as so soon as the trader presses the "buy-to-cover" button on their trading platform. Short positions are classified as either naked or covered. A covered short is a short selling position initiated while owning shares of the stock that has been sold. When a trader sells a security while not actually owning it, this is known as a naked short. In this instance, the trader is using borrowed shares.