Investment Jargon: Short


If you want to make a profit investing you buy low and sell high, but you don’t have to do it in that order. If you think a stock is overvalued you can borrow it from someone else, sell it at what you think is a high price then wait until the price falls and buy it back at the lower price, a process known as “short covering”.

Then you return the share to the person or company from whom you borrowed it. If you are short an asset then if its value increases by 1% you lose 1% and if its value decreases by 1% you gain 1%. If you’re short and the price increases you will lose money but still have to return the stock by buying it back at the higher price in order to return it to the stock lender. In the days following a sharp fall in a stock’s price there is sometimes a brief and partial recovery which pundits often attribute to a wave of short covering: as investors who are short lock in their profit by buying back the stock this will temporarily raise its price. This post-crash rise is also called Dead Cat Bounce.