The concept of a bear raid is based on the idea of combining resources to create a situation in which the prices of various securities are driven down. Those who engage in a bear raid can make a huge profit, but other investors can lose significant amounts of money. Ethical concerns about efforts to artificially force down the price of securities have led many countries to declare the use of bear raids to be illegal.
How It Works
A bear raid might be attempted by a large trader or a cartel of traders who use their combined resources in unison. After the resources are in place, a security is identified as a viable project. The cartel engages in a plan of aggressive short selling on the security, which in turn begins the process of driving down the value of each share of the security. At the same time, it is not unusual for the cartel to use word-of-mouth to create some degree of suspicion about the stability of the security. As the negative reputation of the security begins to affect the price, the cartel is able to begin purchasing shares of the security at lower prices and continue the short selling strategy until the security bottoms out.
After the security has reached a sufficiently low value, the cartel will begin to purchase shares that they will hold onto as the security slowly recovers from the bear raid and the negative rumors begin to subside. This is known as creating an artificial long position, which ultimately can create a great deal of profit for the traders. By buying when the price is low and selling when the price has risen significantly, all expenses associated with the bear raid will be recovered, and the traders can receive an excellent profit from the venture. Although this process might take months or even years to achieve, the allure of the large profits makes the prospect enticing to people who can manage to wait that long for the strategy to work in full.
Costly for Other Investors
The downside of a bear raid is that while the group of traders make a great deal of money, others lose money because of the manipulation that caused the security's value to drop. This mixture of beginning with a short position that moves from short selling to heavy selling to long positions does not involve the natural process of market performance. The very nature of a bear raid is why many countries have enacted strict legislation that makes this tactic illegal and punishable by fines as well as imprisonment.
