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

What Is a Bear?

A bear is an investor who believes that a particular 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 given market or underlying economy. For example, if an investor were bearish on the Standard & Poor's (S&P) 500, that investor would expect prices to fall and attempt to profit from a decline in the broad market index.

A bear may be contrasted with a bull.

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 a constant state of flux as the bears and their optimistic counterparts, bulls, attempt to take control. Over the past 100 years or so, the U.S. stock market has increased, on average, by about 10% per year, inclusive of dividends.

This means that every single long-term market bear has lost money. That said, most investors are bearish on some markets or assets and bullish on others. It is rare for someone to be a bear in all situations and all markets.

Bear Behaviors

Because they are pessimistic concerning 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 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.

Bearish Characteristics

Characteristics of a bear market include:

• 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 that things will be depressed for an extended period

Example of a Bear

Certain high-profile investors have become famous for their persistent bearish sentiment. Peter Schiff is one such investor known in Wall Street circles as the quintessential bear. A stockbroker and author of several books on investing, Schiff evinces unwavering pessimism on paper investments, such as stocks, and prefers those with intrinsic value, such as gold and commodities. Schiff garnered accolades for his prescience in predicting the Great Recession of 2007 to 2009 when, in August 2006, he compared the U.S. economy to the Titanic.

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