Table of Contents
What is Stock Market Manipulation?
How is Stock Market Manipulation carried out?
What are the Various Kinds of Stock Market Manipulation Techniques?
The threat of stock market manipulation is very real. And that is true even in 2024. It is especially challenging for retail traders who participate actively in the stock market in India. In order to make informed trading choices, it is important to understand the signs of stock market manipulation. It is essential to know how to deal with volatile market situations. Read and find out about the common techniques used for stock market manipulation and how you can avoid being their victim.
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What is Stock Market Manipulation?
Stock market manipulation can have a major impact on their trading decisions as well as the overall performance of their investment portfolio. This is a kind of fraud which includes interfering delivery with the normal stock market functioning. A stock market manipulator may attempt to create an artificial demand for some specific stock so has to inflate its price.
In the same way, the manipulator may attempt to develop an artificial supply of some stock so as to reduce its price. Stock market manipulation attempts may also be made to deflate or inflate stock prices artificially, via fraudulent trades.
Stock market manipulation is actually a deceptive practice. It usually involves spreading rumors or false information and ultimately misleading investors so as to distort the dynamics of the market.
Also read: How Has the Indian Stock Market Performed in the Last 10 Years?
How is Stock Market Manipulation carried out?
Manipulators frequently make use of messaging apps such as WhatsApp, social media platforms like Facebook or X and various other online platforms, to spread misleading or false information about stocks. They can make false claims that a specific company is going to come out with a new product sometime soon or is about to merge with a bigger company or going to purchase some other company which would put it on the first track to growth. In a few cases of stock market manipulation, they even make fake videos or news articles in order to support their misleading claims.
Once there is sufficient hype around the intended company, manipulators begin to buy its stocks in significant numbers. This leads to an increase in the prices of the company’s stock, attracting a large number of genuine buyers. After the price goes to a specific level, the shares are sold quickly by the manipulators, in order to make fast profit.
What are the Various Kinds of Stock Market Manipulation Techniques?
There are various stock market manipulation strategies being used today:
Pump and Dump Scheme
A well-known strategy is the Pump and Dump Scheme. This usually involves inflating a stock price artificially through misleading or false statements, with the purpose of making naive investors put their money in it. After the inflation of the stock price, manipulators end up selling their shares at a higher rate. This makes the stock price go down, leaving gullible investors stare at huge losses.
In the Indian stock markets, Pump and dump schemes happen to be a significant problem, especially among mid-cap stocks and small-cap stocks. These types of stocks are more prone to stock market manipulation, given that these have limited market analyst coverage, less liquidity and lower trading volumes.
How Losses from Pump and Dump Schemes can be avoided?
You can follow these important steps:
- Stay away from buying any stock that appears to have been hyped up on online forums, such as social media platforms.
- Carry out your own research about any stock prior to investing in it. You should try to look for sudden spikes in trading prices and volumes and other tell-tale signs of stock market manipulation.
- Try to avoid putting your money in stocks that are thinly traded. These are more vulnerable to these types of fraudulent schemes of manipulators.
- In case you doubt that you have purchased some stocks that might have been hyped up as a part of pump and dump scheme, immediately sell them off.
Insider Trading
In this kind of stock market manipulation, the insiders of a company – such as its employees – sell or purchase its shares based on material facts yet unknown to the public in general. Due to this reason, insiders get an unfair advantage over regular investors. This can lead to market distortion and put investors in a delicate situation.
The insiders of a company can be promoters, key managerial personnel, officers, directors and people having access to undisclosed price sensitive data about the business. Due to official position or professional ties with the company, the insiders are privy to this information which gives them an unfair edge.
Insiders can get this type of material information in various ways. They can have knowledge about significant events such as changes in regulations or launch of a new product before the public gets to know about the same. They can also have access to confidential documents related to the company such as merger acquisition plans or quarterly earnings reports. Insiders can make use of the material information to execute profitable trades in the market.
How to Avoid Being Conned by Insider Trading?
These are a few steps you can try:
- Verify any investment advice that you get particularly from those having access to information not available in the public domain.
- Be attentive to the trading price and volume of a stock and beware of any unexplained or sudden changes.
- In case you are suspicious of any stock of a company or any news information to be part of Insider trading schemes, report about it immediately to SEBI.
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Conclusion
As you can understand, there are plenty of ways of stock market manipulation. Manipulators are constantly coming up with new strategies to con gullible investors out there. It is important to avoid falling prey to them and becoming a victim of their stock market manipulation strategies. Always stay cautious and informed; and make stock market investments like a pro, keeping your hard and money safe from dubious schemes. Do your own research, be aware of sudden hype related to the stock market and report anything suspicious to SEBI.
