Stock market manipulation schemes are used in telemarketing, social media, speed trading as well as other tactics to drive a stock price on purpose up and down. The following step the manipulators do is gain profit from the price movement.
Unsuspicious investors who were lured to invest are left with losses and worthless stocks. Market manipulation however has some regular themes and warning signs.
In this article, we will discuss how stock market manipulation works and its forms. We will focus on one of the forms (insider trading) of stock manipulation briefly.
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Market manipulation is an act that is played in an artificial way for increasing and decreasing the price of a security or influencing the behaviour of the market in such a way that will help them gain personal profit.
Manipulation by law is illegal, but for regulators and other authorities, it becomes hard to detect it, like omnibus accounts.
No working method is easy, whether it is with honesty or dishonesty. When the size along with numbers increase in the market, manipulation becomes difficult for manipulators.
Manipulating small companies is easier and safer for the manipulators because analysts and other market authorities do not give small businesses as much stare as they do on medium and large firms.
Manipulation can be called by three of its infamous names, price manipulation, stock manipulation, and market manipulation.
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How does market manipulation work?
There are uncountable ways of manipulating stock prices in the market all around the world. By decreasing the price of security manipulators achieve a significantly large amount on a small order, which has a price which is lower than the present market price of that security.
Investors get it as a signal that there is something wrong going on with the company. A negative perception pushes the investors forward to sell the securities to push the price of the stock even lower.
One of the trickiest ways of increasing the price of a security is by putting an equal number of buy and sell orders for identical security simultaneously, by using unalike brokers. Therefore, the order cancels each other out.
When the huge volume of orders is executed, it gives an impression to the investor of the increased interest in the security. Hence, it convinces them about the possibilities of future price appreciation. So, they buy that security and end up pushing the original stock price higher.
There are many forms of market manipulation. We will talk about each of them as well as rank the first 5 methods of market manipulation.
One of the best and fraudful ways of market manipulation is market rumours. This happens when the traders and investors start creating false rumours of information to drive the price of the stock up or down even knowing that the opposite is true.
Rumours help the terrible companies look good in the eyes of audiences as well as drive the price up. It is quite hard to drop the standard of a renowned company and make it look unreliable but it is not impossible.
The next stock market manipulation technique is Pump and Dump. It points to a situation where traders make use of mass communications, such as emails, to promote a stock. Often the promotion makes the company look good or maybe more than warranted.
These rumours are mostly done for penny stocks. Which tends to shoot up the price just after. During this process, the scammers sell their share at an increased price and set it down by leaving with the profit. Therefore, the stock price decreased later leaving everyone with a loss.
The third method to manipulate the stock market, used by the criminal traders is front running. In the front running, a person with the knowledge of large market transactions puts trade in front of the transaction in a very favourable manner.
An example to give a clear idea about front running: a huge financial firm is going to make a massive purchase of stock XYZ. Since the transaction is not disclosed to the public it will drive the price of the stock up in an unanticipated manner for everyone.
The analyst of the firm knows about this so, to keep the company safe he buys a bunch of XYZ before the transaction to benefit from the boost of stock price.
Players with lots of cash in hand can also manipulate the stock market by turning to wash trading. It is a method frauds use to buy and sell the security back and forth to increase the volume of trades.
This increase of volume trades fools others into thinking that the stock is going through a lot of activity and is something worth buying. Later it leads to an artificially high price where the schemer shorts the stock (safecoin price prediction), knowing it will get back its value.
Insider trading is considered to be the most famous method of market manipulation. It refers to a situation where an individual knows the backdoor information of a company before it has been disclosed to the public.
For example, a government employee is aware that there is a new regulation yet to be passed that will benefit the electricity company. Now the employee buys the shares of the electricity company secretly and therefore pushes the regulation to move forward as quickly as possible.
Insider trading has been made illegal by many countries. They made rules to prohibit or criminalise insider trading. The reasons are:
- It is unfair for other investors
- It is unethical
- It diminishes people’s confidence
Gaining success through dishonesty and trickery will not keep you going for long. If you know someone who is into all these methods of market manipulation, know that these situations are very serious and end someone up in jail forever.
Following these paths can bring considerable fines and even charge with federal jail sentences. Leave a comment below for further queries.
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