The stock market appears to be stuck in a bearish rut that has the potential to drag on for months or longer. Even if markets rebound in the financial quarters ahead, the overarching bearish trend might weigh down stock prices for a year’s time or possibly even longer. Though it is often said that fortunes are made during bear markets, investors should also be aware of the potential for stock manipulation.
Stock manipulation occurs when individuals or institutions attempt to alter the behavior of others with the underlying goal of making money from others’ misfortune. The sad truth is those market manipulators are often willing to artificially change or lie about prices, supply, demand and other factors that determine the value of financial securities.
Stock manipulators are not always powerful people or institutions. Anyone with a web-connected device could potentially illegally manipulate the price of a stock by simply spreading false information about that business on an online message board, in a chat room, on social media or even with a video posted to YouTube.
The challenge lies in not only remaining aware of the potential for such manipulation but also in taking the precautions necessary to sidestep such traps.
Stock prices change based on supply, demand, economic trends, geopolitical events and other stimuli. However, some price movement is artificial, meaning it is not the natural result of normal market factors such as supply and demand. If you notice a stock has made a significant upward or downward move and there is no underlying reason for the climb/fall, there is a chance that the stock has been manipulated through illegal means.
As an example, a stock that moves as a result of the spread of incorrect information, the posting of fake orders or other attempts to alter prices is probably a stock that has been manipulated. Perform your due diligence, read the rough news stories, earnings reports and latest data pertaining to the stock, and you’ll have a better idea as to whether the price movement in question is justified or if it might be the result of manipulation.
When in doubt, abide by the mantra of doing nothing. You can always establish a position in a stock you have your eye on down the line. However, if you were to establish a large position after spotting potential stock manipulation, I’ve found there is a greater likelihood that you would lose a significant amount of that money, or possibly even all of it.
Above all, keep in mind that it only takes one false piece of information revealed in a tweet, online column or even an internet forum such as Reddit to steer a stock in a different direction.
Though market manipulation is illegal, it occurs regularly. There is simply too much illegal activity occurring for the entirety of it to be documented and penalized by the SEC. Even if the SEC were to flag all potential forms of manipulation, there would not be enough time or manpower to sufficiently analyze all of it.
If you recognize the fact that stock manipulation is fairly common, you will tread lightly when the market turns downward. And always shy away from securities that display signs of potential manipulation.
There is a common misconception that market stock manipulation is easily identified and penalized. The truth is that some market manipulation is quite subtle.
As an example, wash trading is a subtle form of bear market manipulation that makes it appear as though stock is more active than it actually is. The aim of wash trading is to lure victims into the stock as a result of heightened trading volume, and then sell the shares at an elevated price.
Wash trading targets traders who see a spike in daily volume and assume there must be a good reason for the heightened activity. However, if the underlying cause of the increase in trading volume is the result of wash trading, in which sell and buy orders offset one another, it is likely nothing but a trap.
Even a single trader can move the trading volume of a stock higher on any given day by repeatedly buying and selling shares between two separate trading accounts.
Churning is another example of a subtle form of stock manipulation. Churning occurs when a wealth manager, broker or other party boosts trade activity using a client’s funds to spur commissions. If you notice a broker, fund manager or wealth manager is ramping up activity when the market turns downward, he or she might be doing so in an attempt to offset his or her own personal investment losses with commissions resulting from trades made on behalf of the client.
Just because market manipulators are out there doesn’t mean you have to be a victim. To be mindful of attempts to manipulate the market, pay close attention to security prices that increase or decrease more than they usually do in the context of 50-day moving averages and make decisions accordingly. Investing in the stock market is always a risk, but it should be a smart risk.