What Is a Bear Position?

A bear position is a short position applied to a financial security with the belief that the price or value of the security will decrease, resulting in a profit from the short position.

Key Takeaways

  • A bear position is a short position taken on a financial security with the expectation that the price or value of the security will decrease.
  • A bear position is in contrast to a bull position, or long position, which expects that the price of a security will rise.
  • An investor will profit from a bear position if the price falls but if the price rises their losses can be limitless as prices can keep rising.
  • The losses of a bull position are capped when the price of a security falls to zero.
  • The term "bear" has different uses in the financial world, which can refer to a falling stock market, the falling value of one currency to another, and certain types of investing strategies.
  • The use of the words "bull" and "bear" in the financial markets derive from the method in which both animals attack.

Market Mentalities: Bulls Vs. Bears

How a Bear Position Works

A bear position is the inverse of a bull position. A bear, or short, position is a bet against the price of a trade or investment rising or staying flat. A bear position seeks to profit by estimating that prices will fall for certain securities in the market. This determination is usually based on the research of the investor or trader.

The seller that takes the bear position, or the short position, is called a short seller and will borrow securities, hoping for prices to decline. If the price falls, the investor will profit from the change in price. If the price goes up, the investor or trader will take a loss and may be exposed to unlimited losses because the price of the security has the potential to continue to rise.

A bear position is in contrast to a bull position, or long position, in which the value of the security can move against the investor or trader’s position only by a specific amount, to zero. Using alternative strategies when initiating a bear or short position can work to mitigate some of the risks of the unlimited rising price.

There are a number of alternative ways to take bear positions. Examples of this include buying a put option, which would entitle the buyer to sell a portion of their security within a fixed period of time. A put option is not an obligation to sell but rather an option to do so. Buying inverse ETFs, which are exchange traded funds (ETFs) built from a variety of derivatives, allows a buyer to profit from a decline in expected security performance. Another possible bear position is simply taking a short position on a specific stock.

Comparing the Usage of "Bear" in Market Terminology

The use of a bear and a bull are commonly applied to market discussions and reflect the way that both of these animals attack. A bull will thrust its horns upward, while a bear throws its paws downward. These upward or downward positions track market shifts.

A bear market, for example, is a market condition in which the price of securities decline and dwindling investor confidence leads to a self-sustaining, downward spiral in the stock market. This means that investors will expect more losses as the general pessimism increases. Although figures vary, a downturn of 20% or more over a two-month period from a peak in broad market indexes can be considered an entry into a bear market.

The meaning of a dollar bear is, once again, reflective of a negative outlook on the market. In this case, it’s an investor’s outlook for the U.S. dollar against other currencies, expecting a decline. A bear fund is a mutual fund that, amid market downturns, predicts higher returns for investors.

A covered bear is a strategy where a trader makes a short sale against a long position. This bear spread strategy aims to gain when the value of the security falls, but also includes a hedge. This structure puts a limit on losses, whereas a naked short can be subject to much higher losses.