Bears are traders who believe that a market, asset or financial instrument is going to head in a downward trajectory. In that regard, they hold an opposite view to bulls, who believe that a market is going to head upwards.
Why are bears important?
Market sentiment is a key factor in determining how financial market movements play out: if the consensus among traders is that an asset is undervalued, then chances are the asset will increase in price. If the consensus is that it is overvalued, chances are it will drop.
Bearish traders believe that a market will soon drop in value, and will attempt to profit from its drop. This puts them in contention with bulls, who will buy a market in the belief that doing so will return a profit.
When the number of bears trading a market is larger than the number of bulls, the market will usually drop in price. For this reason, a market that is experiencing a sustained drop in price will be referred to as a bear market, whereas one that is increasing in price is a bull market.
Spotting when a bear market is taking hold or coming to an end is key to both profiting and limiting loss when trading.
How do bears make profit?
Bears believe that markets are set to drop in price, so the traditional investment mantra of ‘buy low sell high’ doesn’t apply. Instead, many bears will attempt to short sell.
Short selling is a way of trading an asset that returns a profit if it drops in price. If you were short selling stock, for example, you would borrow some stock from your broker, and immediately sell it at the current market price. Once the stock has dropped in price, you would then buy it and return it to your broker, keeping the difference in price as profit.
There are many other ways to attempt to profit from falling markets. Derivatives can be used to go either long or short on a wide variety of markets.