Buy to Cover Orders for Stock Trading

There isn’t an iota of doubt that stock market bestows upon an individual numerous ways and means of making quick and consistent money. However, this reigning money and profits can stop at any time with one bad strategy or wrong move of the trader. A number of stock market experts believe that the very first step of making money in stock trading is by safeguarding the money that is being invested into the trade and variety of trading strategies have been developed from time to time in order to ensure the same. Buy to cover orders is one of the most robust and useful of all such strategies for every kind of stock trader who is looking forward to make money.
Price anticipation and short selling transactions are two of the pre-requisites of buy to cover orders. Short selling involves a transaction between the trader and his broker where the trader borrows the stock at the current market price and agrees to return it to the broker within an agreed period. Basically, the trader is making a downward bet on the stock he borrows and is immediately selling it in the market, as he anticipates to make a quick profit due to downfall in the price of the stock in near future when he would buy-back the stock in order to return to his broker. The difference between what he earns from selling the stock and what he pays on buying the same is his profit. However, the real market situations may sometimes act completely opposite of what the trader has anticipated and the stock price of the short sell shares can rise instead of falling. Such circumstances have the capability of causing unprecedented losses to the investor that can be covered up fairly by using Buy to cover orders for stock trading.
A buy to cover order is essentially an order that attempts to close a currently open short position at a price that is lower than the current market price. This order requires the trader to buy equal amount of shares that were initially borrowed, so that the entire short sale can be safely ‘covered’ and the shares are returned to the original lender thereby eliminating the potential threat of losing money in the trade. The main advantage of using buy to cover order is that it lets the trader enjoy all the profits that he could possibly earn in the short sale transaction without any fears i.e. only if the market trends work according to his anticipation. Such type of order gives complete freedom to the trader to exit his short position at a stock price that is lower than the current market price and even gives him an opportunity to plan out a minimum limit amount he’s willing to exit at.
However given the volatility and dynamisms of stock markets, there can be situations when the stock market starts behaving against one’s anticipations and a buy to cover order may not really let you exit the trade under such situations. There are chances that the stocks you’ve invested into never reach your limit price, thereby snatching off your freedom to exit the short.
All in all, buy to cover orders are great strategies for making profits in short position provided they are timed well by the trader.

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