How does stock manipulation work & What can investors do to protect their capital?

-Krishna Khatiwada

What do manipulators do? Who are the manipulators?

Big-fish of the market does manipulation for their profit by fluctuating prices, spreading rumors, insider trading etc. Anyone with a huge sum of money can be a manipulator.

How does manipulation work?

Manipulators choose to buy thousands of stock of a single company and massive capital that they bring in the market is sufficient to create a huge demand and stock start up roaring. Financials as well technical both look attractive when price moves up.  Manipulators buy stock in small quantity to increase its price slowly, so could have enough time to make stock attractive in front of the public. When the stock becomes hot-topic of the town, every retail investor wants to buy that stock which generates enough demand to make stock price rise even higher. Manipulators hold the stock as long as they see demand in the market and when the public are not able to push stock price further, they start selling it. For maximum profit, they have to exit before the public. As a result, they sell their stake very rapidly, which causes immediate fall in stock price and when the public finds decreasing stock price, they panic and exit their trade which makes the stock price to go further low.

There are different kinds of manipulation and all are based on the said core concept.

Two kinds of manipulation that are common in the stock market:

1. Lure and Squeeze:

Sometimes the company publishes incomplete and misleading financials intentionally showing that they are in loss, debt is very high, loans are not recovering etc. These financials create negative sentiment in public, as a result of which they start to sell their stakes. This lowers the stock price, after which top-level staffs start buying the stock at low prices. When they find a supply for the stock has reached a maximum, they publish a very positive and logical argument for future growth. Public gets attracted to the company as the stock looks very cheap, so they start buying it again—eventually increasing prices. When demand reaches maximum, the manipulators sell very rapidly and this cycle continues.

2. Insiders Trading:

All publicly traded companies are liable to give all company-based information to public, and promoters are not allowed to act on the news which has not been published officially. But un-announced information of company are not secret as it should be, and in most cases news get leaked to limited people and those will act on it which brings unusual volatility in the market.

These are major manipulation that happens in every small and big stock markets around the world. Manipulation is not alien to the market, it is very common. This is considered bad because nobody explains about it as it’s a non-separating part of trading. The one with huge money usually dominates the weak—it’s an inherent character of nature—you cannot blame a tiger for eating deer and if you calculate the percentage of deer surviving the tiger attack, it could be similar to the retail investors surviving in the market. Most of the manipulation is done on companies with a low number of stocks (low paid-up capital) .

Now the big question is how to survive market manipulation?

For investors:

Do deep analysis before buying any stock and be prepared for large fluctuation. Choose a company with large paid-up capital and track performance of the company continuously; if you find something unfamiliar and unexpected in the financials be cautious but don’t judge a company by just one quarter or by one year report. As long as financials looks good, don’t panic.

For traders:

Be disciplined to your plan. If you catch unexpected moves on either side, be cautious and if the move continues in the same way, then exit the trade. Don’t try to find reasons for movements and don’t react on rumors as well as on big news. Big news brings large volatility in the market. Irrespective of the kind of news, the market could move in the opposite direction.

Manipulators take on public wealth because they know clearly what they are doing; they trade with proper plan and execution whereas public don’t know anything about how they are going to make money in a market; they just think buying and selling will be enough.

Investors and traders should think in a 3D picture from all sides, considering all the possibilities before they purchase stock in market. Manipulators are the king of stock markets so definitely taking their money in market is like snatching meal from tiger’s mouth. In short, making money in stock market is very tough. It requires knowledge, discipline, experience, and most importantly—patience.