What does bearish mean?

Definition

"Bearish" is a commonly used term to express an investor's opinion that a specific security, sector, overall stock market, or a country's economy is anticipated to decrease.

Understanding bearish

An investor with a bearish outlook on the market anticipates a decline in prices and sells stocks in a short position, aiming to make a profit from the discrepancy between the sale price and the projected lower purchase price. Bearish investors oppose market sentiment and wager against it due to their lack of faith in it. Typically, a bear market persists for about ten months, with stock prices dropping by a minimum of 20% during this period, and trading volumes remaining stagnant.

Example

Timothy is a cautious investor who favors safe investments with modest returns over risky ones that offer higher profits. He is also pessimistic about the market, believing that investors will inevitably suffer losses regardless of their investment strategies.

Timothy took advantage of the anticipated market decline by opening a short position for 300 shares of a manufacturing stock, which is currently trading at $124. This involves selling 300 borrowed shares for $124, with the expectation that the price will drop over the next few days. As expected, the stock price falls to $100, and Timothy closes his short position by buying 300 shares at $100, resulting in a gross profit of $7,200 ($300 x $24).

Tim would be more optimistic about the market if he believed that the manufacturing company's stock price would increase, allowing him to sell his shares for a higher profit. If there are a greater number of pessimistic investors selling their stocks, it is more probable that the market will decrease.