Reviewed by Oct 05, 2020| Updated on
A bear raid is an illegal act of ganging up to lower stock prices by coordinated short selling and spreading negative rumours about the target product. Often a bear raid is used by unscrupulous short sellers who want to make a fast buck from their short positions.
The purpose of a bear raid is usually to make windfall profits through short sales over a short period of time. If the bear raid succeeds and the target stock sinks, short sellers will buy the shares back cheaply on the open market.
Short-sellers make money by first selling the shares at what they believe to be is a high price, and then buy them back to close their position at a lower price.
In a typical bear raid, short sellers will collide in advance in order to create massive short positions in the target stock. As the massive short interest in the stock raises the likelihood of a short tightening that can trigger significant losses to the shorts, short sellers can not afford to wait passively for months before their short strategy works out.
When stock prices decline, especially when the company is embroiled in some controversy, stock owners often attribute the declining price to short sellers or bears. Short sellers have been partly responsible at least for several of the big stock market crashes in history.
Typically, a short seller is not the cause for falling prices. Short sellers are the people selling current holdings. Short interest can be tracked through short interest figures.
However, short-sellers currently play a pivotal role in the markets. The short sellers are also the ones that expose or bring to big light issues within businesses. In several cases, these are not fabricated stories meant to lower the price temporarily, but actual facts which could have a significant impact on the value of the company.
While most investors are promoting positive news to drive up shares, sceptics pose the opposite side of the argument, helping stocks remain closer to their true value.