Definition: Bearish is a broadly used term that describes an investor’s belief that a particular security, a sector, the entire stock market or a nation’s economy is expected to decline.
What Does Bearish Mean?
What is the definition of bearish? Believing that the market is likely to get worse, a bearish investor opens a short position to realize a profit from the difference between the price he is selling the stock and the lower price he is expecting to buy it. In fact, bearish investors are against the market sentiment and because they lack confidence in it, they bet against. Usually, a bear market lasts on average ten months and the stock prices decline by at least 20% during this period trading in stagnant volumes.
Let’s look at an example.
Timothy is a risk-averse investor who prefers to invest in relatively safe assets and realize smaller profits than to invest in riskier securities for a higher return. Timothy is a bearish investor who thinks that no matter what strategies investors pursue, they are always those to lose money on the market.
To capitalize on the expected downturn of the market, Timothy opens a short position for 300 shares of a manufacturing stock that currently trades at $124. By opening the short position, Timothy uses short selling, i.e. he sells 300 borrowed shares for $124, expecting that the price will decline over the next days. The stock price drops to $100 and Timothy covers his short position at $100, i.e. he buys the 300 shares at $100 and he realizes a gross profit of $300 x 24 = $7,200.
If Tim had more confidence in the market, he would expect that the stock price of the manufacturing company will rise, and he would sell his stocks at a higher price to realize a profit. The more the bearish investors, the more likely is the market declining as a result of the massive selling of stocks.
Define Bearish: Bearish means an investor who leery of investing because he or she thinks the market is too volatile or will simply drop.