What Does it Mean to Cover a Stock?

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The phrase "cover a stock" might have either of two meanings. One the one hand, the research departments of a broker-dealer will typically have a range of stocks that they "cover"--i.e., for which which they give buy or sell (or hold) recommendations. On the other hand, the word "cover" sometimes refers to the act of purchasing a stock one has already sold. This is "covering" one's short position in that stock.

Research Departments

The research departments of broker-dealers contain "sell-side analysts," each of whom individually might "cover" only a particular industry. For example, Glen Campbell covers telecommunications and cable companies in North America for Merrill Lynch. It might be of great importance to the Chief Financial Officer of Telus, a Canadian telecom concern, to know that it is on the list of companies Campbell covers. Should he drop Telus from his list, perhaps simply in the hope of focusing his time and energies upon a narrower list of firms, Telus's absence from Campbell's reports would mean a loss of visibility for that company in the investment world, and may well do it real harm.

The Network

Analysts form a network. The telecom analyst at one brokerage will know, and exchange ideas with, the analyst at another. Further, their lists of covered stocks will not coincide, although they will overlap considerably. Anne Fleischer and Joel A.C. Baum, economists at the University of Toronto, have described the effects of this network. The analysts who both cover a certain stock (such as Telus) will also cover other stocks in common, and "obtain information not only from each other’s earnings forecasts, technical analyses, and recommendations regarding the focal stock, but also from the other related stocks they jointly cover. The volume of information flowing between stocks depends on the number of analysts covering them jointly: the more analysts, the greater the volume of information available."

Covering a Short Stock Sale

Some traders in stock take short positions. What this means is that they borrow the stock from a broker-dealer in order to sell it to a willing market buyer in the hope and expectation that the price of the stock will fall after that transaction, but before they have to return the borrowed shares. If the price of the stock does decline during this period, they "cover" their position with their lender with the cheaper stock. Thus, they have "bought low and sold high" like all successful investors, but in the opposite chronological order.

Misconceptions

Covering a short position is distinct from "boxing" the position. Someone with a short position in XYZ might want to buy shares in XYZ and hold them, while continuing to owe his broker the XYZ shares borrowed earlier. This person now has two positions in XYZ that offset one another, and this is known as boxing.

A trader who covers the short in XYZ, on the other hand, has not offset her position--she has closed it out.

"This terminology leads to bad jokes about boxing your shorts," warns Robert Jaeger in his book "All About Hedge Funds."

Expert Insight

James Cramer has cautioned his readers that, if they want to buy stock for the purpose of covering their short position, they have to be clear in their instructions. "You should say that [you are covering] in the order so the broker knows exactly what you are intending."