A bear raid involves combining resources to force down the prices of securities, allowing traders to make profits but causing losses for other investors. This tactic is illegal in many countries due to ethical concerns and the manipulation of market performance.
The concept of a bear raid is based on the idea of combining resources to create a situation where the prices of various securities go down. Those who participate in a bear raid can make huge profits, but other investors can lose significant amounts of money. Ethical concerns about efforts to artificially force stock prices down have led many countries to outlaw the use of bear raids.
How does it work?
A large merchant or merchant cartel can attempt a raid of bears using their combined resources in unison. Once the resources are in place, a security is identified as a viable project. The cartel engages in an aggressive short-selling plan for the security, which in turn begins the process of reducing the value of each share of the security. At the same time, it’s not unusual for the cartel to use word of mouth to create some degree of suspicion about security stability. As the security’s negative reputation begins to affect the price, the cartel may start buying shares of the security at lower prices and continue the shorting strategy until the security bottoms out.
After the value has reached a sufficiently low value, the cartel will start buying shares which they will hold as the value slowly recovers from the bearish sweep and the negative rumors begin to subside. This is known as creating an artificial long position, which can ultimately lead to a large profit for traders. By buying when the price is low and selling when the price has increased significantly, all expenses associated with the bear raid will be recovered, and traders can receive an excellent profit from the company. Although this process can take months or even years to achieve, the lure of big wins makes the prospect attractive to people who can wait that long for the strategy to fully work.
Expensive for other investors
The downside of a bear raid is that while the group of traders makes a lot of money, others lose money due to the manipulation that caused the value of the security to fall. This combination of starting short moving from short to heavy selling to long does not involve the natural process of market performance. The very nature of a bear raid is why many countries have enacted strict legislation making this tactic illegal and punishable by fines and imprisonment.
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