What is a 'Bear Raid'

A bear raid is the illegal practice of ganging up to push a stock's price lower through concerted short selling and spreading adverse rumors about the targeted company. A bear raid is sometimes resorted to by unscrupulous short sellers who want to make a quick buck from their short positions. A bear-raid target is generally a company that is going through a challenging period, since its vulnerable position makes it easy fodder for short sellers. While short selling per se is perfectly legal, coordinated short selling is viewed as market manipulation by the Securities and Exchange Commission (SEC), while spreading false rumors is tantamount to fraudulent activity.

BREAKING DOWN 'Bear Raid'

The objective of a bear raid is usually to make windfall profits in a brief time period through short sales. If the bear raid works and the target stock plunges, short sellers can buy the shares cheaply on the open market. These shares would be used to replace the ones that were borrowed earlier and sold at a much higher price, with the short sellers pocketing the difference as their profit.

In a typical bear raid, short sellers may collude beforehand to establish massive short positions in the target stock. Since the huge short interest in the stock increases the risk of a short squeeze that can inflict substantial losses on the "shorts," these short sellers cannot afford to wait patiently for months until their short strategy works out. So they embark on the next step in the bear raid, which is akin to a smear campaign, with whispers and rumors about the company spread by unknown sources. These rumors can be anything that portrays the target company in a negative light – allegations about accounting fraud, an SEC investigation, an earnings miss, financial difficulties and so on. The rumors may cause nervous investors to exit the stock in droves, driving it down further and giving the short sellers profits on a platter.

The repeal of the uptick rule in July 2007 is regarded by some experts as having made it easier for short sellers to embark on bear raids. In fact, the collapse or near-collapse of a number of leading financial institutions in 2008 is attributed in some circles to bear raids. A combination of sheer chaos, lack of honor, missing morals and greed on Wall Street makes this theory plausible.

RELATED TERMS
  1. Short Covering

    Short covering is buying back borrowed securities in order to ...
  2. Premium Raid

    Premium raid is an action akin to a hostile bid for a company ...
  3. Bear Squeeze

    During a bear squeeze, market conditions force investors to buy ...
  4. Short Squeeze

    A short squeeze is when a heavily shorted security moves sharply ...
  5. Weak Shorts

    Weak shorts refer to traders or investors who hold a short position ...
  6. Short Interest

    Short interest, an indicator of market sentiment, is the amount ...
Related Articles
  1. Investing

    Short selling basics

    Short sellers enable the markets to function smoothly by providing liquidity and also serve as a restraining influence on investors’ over-exuberance.
  2. Trading

    The Short Squeeze Method

    Trading a short squeeze can be risky, but also very rewarding for those who master it.
  3. Trading

    Short interest: What it tells us

    Whether you agree with the overall sentiment or not, short interest is a data point worth adding to you overall analysis of a stock.
  4. Financial Advisor

    The 5 Most Shorted NYSE Stocks (VALE, CHK)

    Understand what a short sale is and why people would want to initiate a short strategy. Learn about the top five most shorted stocks on the NYSE.
  5. Trading

    Understanding Short Covering

    Short covering is buying back borrowed securities to close an open short position.
  6. Trading

    Short Squeeze

    A short squeeze refers to a jump in a stock's price, forcing a large number of short sellers to close their position, which in effect pushes the price even higher. When an investor shorts a stock, ...
RELATED FAQS
  1. How is it possible to trade on a stock you don't own, as is done in short selling?

    Understand how the process of short selling allows a person to sell a stock without technically owning it. Read Answer >>
  2. What is the difference between a short squeeze and short covering?

    Learn about short covering and short squeezes, the difference them and what causes short squeezes. Read Answer >>
  3. How does one make money short selling?

    Short sellers make money by betting a stock they sell will drop in price. If it drops, the short seller buys it back at a ... Read Answer >>
  4. What Part of a Company's Float Can Be Shorted?

    The quick answer: The number of shares shorted can actually exceed 50% of the float in a company. Read Answer >>
Trading Center