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Bear Position

Reviewed by Anjaneyulu | Updated on Oct 05, 2020

Catalogue

Introduction

The bear position is a term that represents a short position applied to a financial guarantee. A position of the bear is an inverse of a position of bull. A bear or short place is a bet against the price of rising or staying flat in a trade or investment. A bear position aims to benefit from anticipating a decline in market values for such securities.

Understanding Bear Position

The seller who is taking the bear position, or the short position, is called a short seller and will borrow securities in hopes of falling prices. If the price drops, the investor profits from the price change. The investor/trader will incur a loss if the price goes up and may be exposed to unlimited losses because the security price has the potential to continue rising.

Contrast this position with the long position where the security interest will change only a certain sum against the direction of the buyer or trader, to zero. Using alternative strategies can work to mitigate some of those risks when initiating a bear or short position.

There are several alternative ways to take bear positions. Examples include buying a put option, which would entitle the buyer to sell a portion of their security within a fixed time, or buying inverse ETFs, an exchange-traded fund built from a variety of derivatives allowing the buyer to profit from the decline in expected performance.

Bear in Market Terminology

Using a bear and a bull is usually applied to market discussions and represents the way the animals strike. A bull pushes up its ears, while a bear puts down its paws. Such upward or downward positions track changes in the market.

For example, a bear market is a market environment in which securities price falls, and investor trust diminishes leading to a self-sustaining, downward spiral in the stock market. This means investors will expect more losses as the overall pessimism grows. Although the figures vary, 20% or more decline over two months from a peak in broad market indexes can be considered as the entry into a bear market.

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