Is the stock market manipulated? Of course, it is. Here are five prime examples of how nefarious traders can manipulate share prices to profit:
- Fake news: They spread false or misleading information about a company or its stock in order to drive the price up or down. For example, a trader might spread rumors that a company is about to announce good news, which would cause the stock price to go up. Once they do, the trader could sell their shares at a profit.
- Pump and dump: A group of traders artificially inflate the price of a stock by buying it up and then selling it off at a higher price. The scheme is often carried out by promoters who spread false or misleading information about the stock to unsuspecting investors.
- Spoofing: This involves placing large orders to buy or sell a stock without the intention of actually executing the orders. The goal is to create the illusion of high demand or supply, which can drive the price of the stock up or down.
- Wash trading: This involves buying and selling a stock between two accounts that are controlled by the same person or group. The goal is to create the illusion of trading activity, which can artificially inflate the volume of a stock.
- Bear raiding: This is a scheme where a large trader sells a large number of shares of a stock in order to drive the price down. The goal is to force other investors to sell their shares at a loss.
What It Means For Your Portfolio
In spite of the many ways to manipulate share prices, they all tend to have an effect only in the short-term. It’s very difficult to sustain a manipulation for a long time period because of the near infinite amounts of capital needed to continually influence share prices.
In the US, for example, when bear markets hit, regulators often ask who the big short sellers are profiting from the misery of others. The reality is share price declines for sustained periods are a function of lack of demand for long periods. In essence, when buyers disappear the only way for prices to go is down. The mythical short seller with the power to drive markets ever lower for long periods simply doesn’t exist.
But just because the mythical creature doesn’t exist doesn’t mean long-term share price manipulation isn’t possible. And most recently we’ve seen it in China.
Should China Stock Holders Be Terrified?
Word has leaked that the Chinese government has restricted the sale of shares on stocks. Due to the inner turmoil economically, it makes logical sense, at first glance, for the government to stem the tide of a big selloff by shareholders to short up liquidity.
The problem is it has quite the opposite effect as shareholders lose confidence in the marketplace. No longer are sales permitted meaning supply vanishes.
While the policy is in place, it makes sense that share prices hold their ground, but once the policy is lifted a wave of panic selling can cascade through the market.
How To Play It
If you own Chinese stocks, and are not yet affected, now would be a great time to discuss the proposed/in-effect restrictions on sales with your financial advisor to see how best to navigate what could be highly choppy waters in the coming months.