While you might have a good grasp on the ins and outs of the stock market, it’s impossible to predict its future. That doesn’t stop some people from cheating the system for their own benefit, though. Read on to learn all about market manipulation, including how to spot it and avoid becoming a victim.
What Is Market Manipulation?
Market manipulation happens when someone tries to rig the supply and demand of a particular stock or another type of security. It’s a scam that could lead you into thinking the market is going one way when it’s actually not. It’s also illegal.
Someone acting in bad faith might try to manipulate the market by inflating or deflating a security price to earn some extra cash. Their goal is to trick you into believing a stock or another security is performing a certain way and then capitalize on your ignorance.
Examples of Market Manipulation
There are several ways market manipulators set out to trick investors. Here are a few of the most common.
Pump and dump: This occurs when a person gives false or misleading statements about a company’s stock in order for it to gain traction. The demand goes up and prices increase. People who employ a pump-and-dump scheme might falsely claim that a stock is expected to perform in a certain way, or they may spread rumors about company moves that could garner attention from potential investors. Once enough people fall for the ruse, the dumping begins. Insiders or those who created the false claims in the first place will offload their shares of the company into the market. With empty promises and a tanking stock, ignorant investors lose their money.
Poop and scoop: While pump and dump increases the demand for a stock, poop and scoop is the opposite. This scheme spreads false and misleading information about a company or security in an attempt to cause a huge drop in the stock price. It “poops” on the stock, making investors drop their investments so insiders can “scoop” in and pick it up for cheap.
Painting the tape: When a few people band together to inflate the price of a security by buying and selling it among themselves, it’s a form of market manipulation called “painting the tape.” This scheme gives the illusion that there is a lot of trading activity going on, when in reality only a few wily people are actually trading. As momentum builds and more and more investors want to buy in, the price escalates. This results in the original small group’s end goal: to drive up the price of the stock and then sell it to unwitting investors.
Wash trading: While market manipulation tactics usually consist of a few people trying to trick a lot of people, wash trading comes down to a single individual who’s running the scam. To make it work, a big-time influencer or investor buys and sells the same stock over and over again in quick succession to increase its volume. This makes the stock attractive to potential investors, who think the spike in activity means it’s worth jumping on.
How to Avoid Market Scams
Market manipulation, of course, is illegal. But that doesn’t stop some people from doing it anyway — as it happens, these deceptive practices are not so easy to notice.
That said, as the market expands with more investors, it becomes increasingly difficult to trick people. Scamming investors into believing a stock will behave in a certain way might work with some companies, but not all. Large corporations are much less susceptible to market manipulation than, say, smaller companies or penny stocks.
The impact of market manipulation hurts day traders and other short-term traders the most. While long-term investments can be targeted, it’s easier to fool people into short-term gains (and losses) than long-term ones.
But no investor wants to be manipulated. Before you act on certain information, check to see where it’s coming from. It might take more work on your part to verify and vet the source, but it’s better than making a move that could result in tons of lost money.
The Bottom Line
Falling victim to market manipulation isn’t fun. It is also expensive. Hard-earned money that’s lost because you jumped onto an otherwise fraudulent claim can be hard to recoup. Suspect fraud? Report it to the Securities and Exchange Commission. If you think you’ve been duped, the SEC wants to make sure others won’t be.
Avoid market manipulation by staying away from low-volume securities. Smaller companies and penny stocks are more prone to market manipulation. While they might seem enticing to get in on, be cautious when doing so.
Tips for Long-term Investing
- Market manipulation affects day traders and short-term investments the most. Don’t be fooled into acting quickly; instead, make investments for the long-term. Long-term investments can be affected by market manipulation, but they’re less likely to be as comprised as their short-term siblings.
- If you’re struggling to understand how the market moves, or you want your money to work harder for you, consider talking to an expert. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in just 5 minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
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