The concept of a bear raid is based on the idea of combining resources to create a situation where the prices of various securities are driven down. Along with ethical concerns about efforts to artificially force down the price of securities, many countries have deemed the use of the bear raid as illegal. Here is some background on how the bear raid works, and what the anticipated benefits of such a strategy would entail.

In order to attempt a bear raid, it is possible to either be a large trader, or to assemble a cartel of traders who will use their combined resources in unison. Once the resources are in place, a security will be identified as a viable project. The cartel will engage in a plan of aggressive short selling on the security, which in turn will begin the process of driving down the value of each share of the security. At the same time, it is not unusual for the cartel begin using word of mouth to create some degree of suspicion about the stability of the security. As the negative reputation of the security begins to impact 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.

Once the security has reached a sufficiently low value, the cartel will begin to purchase shares that they will hold on to 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, as well as realizing an excellent profit from the venture. While the process may in fact take months and possibly years to achieve, the allure of the large profits makes the prospect enticing to those who can manage to wait that long for the strategy to work toward resolution.

The downside of the bear raid is that while the group of traders make a great deal of money, others lose money due to the manipulation that caused the security 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. Because of the very nature of the bear raid, many countries have enacted strict legislation that makes the bear raid illegal and punishable by a range of fines as well as imprisonment.