What is Bearish?
Bearish is a broadly used term that describes an investor’s belief that a particular security, a sector, the entire stock market or a nation’s economy is expected to decline.
Being bearish is the exact opposite of being bullish — it’s the belief that the price of an asset will fall. To say “he’s bearish on stocks” means he believes the price of stocks will decline in value.
Just like with bullish opinions, a person may hold bearish beliefs about a specific company or about a broad range of assets. A trader with bearish beliefs may choose to act on them or not. If the trader does act, they may sell shares they currently own, or they may go short.
The term “bear” or “bearish” comes from the bear, who strikes downward with its paws, thus pushing prices down.
‘Bearish Trend’ in financial markets can be defined as a downward trend in the prices of an industry’s stocks or the overall fall in broad market indices. Bearish trend is characterized by heavy investor pessimism about the declining market prices scenario. A fall in the prices of about 20% is identified as a bearish trend.
What Does it Mean to be Bearish in Trading?
In trading, there are two distinct types of mindsets while trading — the Bears (sellers) and the Bulls (buyers). To put it plainly, Bears think things are going to get worse (i.e. bearish) and therefore enter the market with a sell. After entering a bearish position in the market, you’re what is called “short”. Price movement from this point up or down will change a bear’s account value in increments of the chosen market.
Being bearish in trading means you believe that a market, asset or financial instrument is going to experience a downward trajectory. Being bearish is the opposite of being bullish, which means that you think the market is heading upwards.
Being able to identify bearish trends is an important part of trading because market sentiment is a key factor in determining how financial markets move. When the bearish pressure in a market is stronger than the bullish pressures, the market will usually drop in price. For this reason, a market that is experiencing a sustained decline in price will be referred to as a bear market. Spotting when a bear market is taking hold or coming to an end is key to both profiting and limiting loss when trading.
Bearish traders believe that a market will soon drop in value and so attempt to profit from its decline. This puts them in contention with bulls, who will buy a market in the belief that doing so will return a profit.
Because bears are pessimistic concerning the direction of the market, they use various techniques that, unlike traditional investing strategies, profit when the market falls and lose money when it rises. The most common of these techniques is known as short selling. This strategy represents the inverse of the traditional buy-low-sell-high mentality of investing. Short sellers buy low and sell high, but in reverse order, selling first and buying later once — they hope — the price has declined.
Short selling is possible by borrowing shares from a broker to sell. After receiving the proceeds from the sale, the short seller still owes the broker the number of shares he borrowed. His objective, then, is to replenish them at a later date and for a lower price, enabling him to pocket the difference as profit. Compared to traditional investing, short selling is fraught with greater risk. In a traditional investment, because the price of a security can only fall to zero, the investor can only lose the amount he invested. With short selling, the price can theoretically rise to infinity. Therefore, no limit exists on the amount a short seller stands to lose.
How to Take a Bearish Position
To take a bearish position, many traders will short sell. Short-selling is a way of trading that returns a profit if an asset drops in price.
Traditionally, 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. However, derivatives – such as spread betting and CFDs – have made the practice of short-selling much more accessible, as they can be used to buy and sell a wide variety of markets.
There are many other ways to attempt to profit from falling markets. For example, inverse ETFs are designed to reverse any price movement in their benchmark index.