What is a "Bear Raid"?

If you have been watching the financial news as of late (which is likely considering the recent fall in Bear Stearns and the ensuing panic that followed) then you have probably heard the term "bear raid" being discussed.

What exactly is a "bear raid"?

First off, when it comes to the stock market, you have two kinds of people. Bulls and bears. Bulls are optimistic and think that a market or an individual stock will go higher, while bears are the opposite. They believe that a market or individual stock will drop.

A "bear raid" is a concerted effort to force a stock to fall in price. A "bear raid" is normally carried out by more than one trader. A "bear raid" will sometimes involve the spreading of false rumors in order to cause panic in the stock and force it to drop even faster.

What does someone get out of participating in a "bear raid"? Well, they will be short the company's stock (meaning, they are betting on the stock to drop), and will profit if the stock falls. The further a stock falls, the more profit that they will realize.

Many people blamed the drop in Bear Stearns on a "bear raid". Many think that there was a concerted effort to short the stock and then spread rumors that the company was in dire financial condition. In this case the rumors became an almost self-fulfilling prophecy - as rumors spread about Bear Stearns, more companies pulled back from doing business with them and the company collapsed. This is a "chicken or the egg" type of situation - did Bear Stearns collapse due to rumors being spread about the company, or was the collapse a foregone conclusion and the rumors were actually true?

HBOS, the UK's biggest mortgage lender, suffered from a "bear raid" last week. A false rumor was spread about the company, saying that the bank was facing a major liquidity crisis and was about to ask the Bank of England for emergency funding. The stock plunged 17%, wiping billions of dollars off the market cap of the company. The rumors turned out to be totally false, but given the jittery nature of the markets last week, the stock was ripe for a "bear raid".

Spreading false rumors about a company is completely illegal and I am sure that whoever was behind this will be discovered. The SEC have also announced that they will be investigating the circumstances surrounding Bear Stearn's plunge a few weeks ago. They will undoubtedly be looking into the possibility that someone spread false information about the company in order to profit from a falling stock. This is the nature of the beast on Wall Street, where profits sometimes come at any price.

Filed under: Stock Market Education | General Knowledge