There is no agreed-upon definition of securities or stock market manipulation. It’s one of those strange things that everyone recognizes when they see it, but no one has been able to define it satisfactorily.
Stock Market Manipulation is deliberate or wilful conduct intended to mislead or defraud investors by controlling or artificially affecting the price of securities, or intentional intrusion with the free forces of supply and demand.
Market manipulation occurs when someone attempts to rig the supply or demand of specific security so that other investors and traders believe the price of that security is moving in one direction when it is not. To earn extra money, one or more people acting in bad faith may attempt to manipulate the market by inflating or deflating the price of a security. Their goal is to dupe others into believing a stock or other security is performing poorly and then profit from that mistake.
Market manipulation may take the form of carefully orchestrated ‘interactions’ in chat rooms, social media, or message boards about specific stocks or markets.
Let’s look into types of Stock market manipulation,
Pump and dump: This happens when someone intentionally makes false or misleading claims about a company’s stock in order for it to gain momentum. Demand rises, and prices rise in response. Pump-and-dump operators may falsely say that a stock is supposed to perform a certain way, or they may spread rumors about company movements in order to attract potential investors’ attention. When a large number of people fall for the ruse, the dumping begins. Insiders, or those who made false statements in the first place, will sell their company stock on the open market. Naive investors suffer as a result of empty promises and a falling stock.
Fraudsters may use a variety of methods, including the internet, spam, and faxes, to weaken or strengthen security. Allegations that a company has a great new contract or that a great new contract fell through, that a company has just made a crucial discovery or obtained a lucrative patent, or that sales or profit came in unexpectedly high or surprisingly small are examples of deliberate falsehoods.
Trading Manipulation: This is when you trade at specific volumes and times intended to mislead the market about the value of your stock.
- Wash Trading: Wash trading is when one or more schemers buy and sell the same asset several times in a short period of time in order to maximize its volume. This makes the stock appealing to potential buyers, who believe the surge in activity indicates it’s a good time to buy
- Painting the tape: This type of market manipulation occurs when a group of people joins forces to artificially inflate the price of a security by buying and selling it among themselves. This scheme gives the impression that there is a lot of trading going on when, in fact, only a few sly individuals are trading. The price increases as demand grows and more buyers want to get in on the action. This accomplishes the initial small group’s goal of driving up the stock price and then selling it to unwitting buyers.
Churning: Churning is a term used to describe a broker’s practice of trading excessively in a client’s account in order to generate commissions. Churning is a malicious and illegal activity that goes against SEC rules (15c1-7) and securities laws. Although there is no quantitative indicator of churning, it can be characterized by the regular buying and sale of securities that do not fulfill the client’s investment objectives.
Giving false statements — misleading — to the public may be used in a deception. However, “manipulation” does not always necessitate false statements or false words. It is entirely possible to accomplish this through actions that illegally deceive the public, where no words are ever spoken to the public.
How to avoid Stock market manipulation?
There are several steps you can take to defend yourself from market manipulation, some of which are negative and some of which are positive.
Low-volume stocks, microcap stocks, and penny stocks should all be avoided because they are much easier to exploit than large-cap stocks or shares of high-volume trading. When day trading, proceed with extreme caution. Check to see where a tantalizing report is coming from before acting on it. It may take a little more effort and time on your part to check and vet the source, but it’s preferable to risk losing a lot of money.
Get a financial plan in place that requires a strict asset allocation, and stick to it – regardless of what you read on social media. Working with a financial planner is the perfect way to create a reliable financial plan.
Disclaimer: There are potential risks relating to trading and investing and you should not trade with money that you cannot afford to lose however, for those that educate themselves and adopt appropriate risk management strategies, the potential update can be significant. Please note that all opinions, research, analysis, and other information are provided as general market commentary and not as specific investment advice.
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