When trying to familiarize yourself with stock options trading names or stock investments in general, you may have read many stock research sites. And in the course of doing so, you may have come across the term “cover a stock.” But do you understand the stock coverage meaning and its implications for your investments?
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Stock Coverage Meaning
In stock market investing, stock coverage has various meanings depending on those who are doing the investing and what activities are taking place. It is important that you understand the context in which the term “to cover a stock” is used so that you can make sense of what is happening.
Below are the various contexts in which the term may be used by investors and analysts.
1. Exposure Reduction
Generally speaking, the term “cover” is used when an investor needs to reduce his exposure in the stock market, usually by doing something that reduces his liability. So, it can be used to describe the actions that people take to protect their portfolio’s value to safeguard it against the volatility in the stock market.
2. Stock Analysis
Also, when an analyst in a stock brokerage or investment company closely follows a particular stock or group of stocks to gain insight into its performance and enable them to predict earnings, that person is said “to cover” the stock in question. These analysts are usually referred to as sell-side equity analysts. And the stock is known as “covered stock.”
That analyst is also expected to provide insight into the company’s future position, have an opinion on the price targets and recommend whether investments are worth buying or selling. And they will do this by publishing research reports.
When the analyst first begins to cover a stock, their first report will be known as the “initiating coverage” stock report. Subsequent changes will be issued in the form of periodic updates during the year. And when something major happens, a new analyst rating may be issued.
3. Stock Options Trading
If you are interested in options trading, you may also come across the term “covered call.” The term is used to describe a trading strategy you can use when you own stock shares (possess an existing long position) whose share prices will likely remain unchanged for a while, and yet you want to generate returns.
In such a case, you will write call options usually at a strike price that is a bit higher than your share price, which are based on the company stock you already possess. You can select a short deadline to reduce the likelihood of significant price changes in the underlying stock.
If the price remains neutral as you expected, the call options will become worthless and you still make money. On the other hand, if share prices fall, you get some a little bit of protection by minimizing your losses.
4. Short Selling of Stock
Short-selling a stock is the process of selling a stock that you don’t own. In such cases, you borrow the stock from your broker, sell it when high and hopefully buy back all the sold shares when the price is low so you make a profit.
In such cases, investors cover a stock using the “buy to cover” strategy. The strategy involves buying a similar number of shares they have borrowed to cover the shorted shares in case the price unexpectedly rises instead of falling. That way, they avoid the short-squeeze. And they can comfortably close their short position.
Due to the various stock coverage meanings that exist within the investment world, you need to look for the context in which they are used. To cover a stock from the analyst’s perspective is different from covering a stock during a short sale. And learning the implications of each will help you gain insight into different company stocks and to decide on your next more.
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- Corporate Finance Institute: Stock Market
- Schmoop: Covered Stock (Coverage)
- Corporate Finance Institute: Sell Side Analyst
- Corporate Finance Institute: Equity Research Report
- Optionstrading.Org: Covered Call Strategy
- Investor.Gov: Stock Purchases and Sales: Long and Short
- Corporate Finance Institute: Short Covering
I hold a BS in Computer Science and have been a freelance writer since 2011. When I am not writing, I enjoy reading, watching cooking and lifestyle shows, and fantasizing about world travels.