What Is a Bear in Investing How Bears Trade Pros and Cons

A bear is an investor who believes that a security or the broader market is headed downward and may attempt to profit from a decline in stock prices. Bears are typically pessimistic about the state of a market or the underlying economy. For example, if an investor is bearish on the Standard & Poor’s (S&P) 500, they would expect prices to fall and attempt to profit from a decline in the broad market index. Bears may contrast with bulls.

Key Takeaways:

– Bears are investors who are pessimistic about markets and expect prices to decline in the near- to medium-term.

– Bearish investors may take short positions in the market to profit off of declining prices.

– Often, bears are contrarian investors, and over the long-run, bullish investors tend to prevail.

– Bears can be contrasted with bulls, who are optimistic about the market’s future.

Understanding Bears:

Bearish sentiment can be applied to all types of markets, including commodity markets, stock markets, and the bond market. The stock market is in constant flux as bears and bulls attempt to take control. Over the past 100 years, the U.S. stock market has increased by an average of about 10% per year, inclusive of dividends. Every long-term market bear has lost money, but most investors are bearish on some markets/assets and bullish on others. It is rare for someone to be a bear in all situations and markets.

A bear market technically occurs when market prices drop 20% or more from recent highs.

Bear Behaviors:

Because they are pessimistic about the direction of the market, bears use various techniques that, unlike traditional investing strategies, profit when the market falls and lose money when it rises. The most common technique is short selling. Short sellers borrow shares from a broker to sell. After the sale, the short seller owes the broker the borrowed shares. Their objective is to replenish the shares at a later date and at a lower price, pocketing the difference as profit. Short selling carries greater risk than traditional investing because there is no limit on the amount a short seller stands to lose.

Bearish Characteristics:

– A prolonged period of declining stock prices (usually by at least 20% or more over a minimum of two months)

– A weak or weakening economy

– Declining investor confidence

– Declining investor optimism

– Rising unemployment

– A general expectation of extended depression

Example of a Bear:

It should be noted that Schiff, throughout his career, has made many doom-and-gloom predictions that never came to fruition.

How Can Bears Profit from Down Markets?

Bears profit from selling stocks or ETFs short, borrowing shares and selling them, hoping to buy them back at a lower price and return the shares to the lender. They can also use inverse ETFs, mutual funds, derivatives like put options, or sell futures to go short.

How Long Do Bear Markets Last?

Bear markets occur regularly throughout history. On average, bear markets in the U.S. have lasted 289 days (around 9.50 months), while bull markets have lasted an average of 2 years and 8 months.

Why Are They Called Bulls and Bears?

The origins of the terms bulls and bears are unclear, but there are a few theories. One suggests that bulls attack by bringing their horns upward, while bears attack by swiping their paws downward. Another theory claims that it comes from the early fur trade when bearskins were seen as particularly risky.