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Economy

What is Market Manipulation? Useful Things to Know

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As part of a globalised economic system, there is a market economy featuring price signals that are created by the forces of supply and demand.

It is where market economies rely upon a price system as a signal to market actors, in order for them to more effectively adjust production and investment.

However, when there is a deliberate attempt to influence or interfere with the free and fair operation of the market, it can cause many serious problems for investors.

In this article, we will be assessing this concept, known as market manipulation – what it is, when it occurs, and how best to guard against it as a trader. 

What is Market Manipulation?

Market manipulation can be defined as the act of artificially inflating or deflating the price of a security, in an attempt to skew supply and demand in a particular way for personal gain.

It can occur in a variety of ways, including via the spreading of misleading or false information about a company, thereby encouraging investor interest or a sell-off scenario. 

Demand can also be exaggerated through conducting a series of transactions with the intention of making a security appear more actively traded, in turn affecting the share price. 

Moreover, conspiring to fix or inflate prices through the act of price rigging is another form of manipulation, with the goal of achieving higher profits at the expense of investors.

Indeed, the process of stock market manipulation takes many forms and is performed on various scales and to differing extents, depending on the intended aims and the actors involved.

Market Manipulation Types

Pump-and-Dump

This is a scheme whereby the price of a security or stock is boosted illegally through fake recommendations that are based on false, misleading, or exaggerated statements. 

The perpetrators normally target micro- and small-cap stocks and already have an established position within these companies, as they are relatively easy to manipulate. 

They will then sell their positions once the stock has been over-hyped to a higher price, while the high volume of duped investors are stuck with a stock that will subsequently fall in value.

Those most at risk from this scam are short-term traders looking for a quick profit, with the vast majority of retail investors, who are the unfortunate victims of this, standing to lose at least some of their capital.

Wash Trading

In this stock market manipulation method, a trader buys and sells a security with the primary intention of making a profit by feeding misleading information to the market.

Sometimes the process involves collusion between a trader and a broker, while other instances involve a single individual acting as both the buyer and seller.

On a basic level, wash trades have no tangible commercial value, as they feature trades that essentially cancel each other out.

Unlike other forms of manipulation, in wash trading the trades are actually fulfilled, with orders being created many thousands of times per day as a ploy to draw in and attract traders.

Bear Raid

The purpose of a bear raid is to push down the price of a stock through short-selling, often by spreading false information in the process.

Short-selling in itself is not illegal, but it can break the law if the short-sellers are in collusion and share fake news or rumours that are not based on fact.

It should not be confused with selling and shorting for legitimate reasons, such as when a company is experiencing difficulties or when investors see the stock as too risky.

In these cases, it can be viewed as a bearish price action, and specifically not as a bear raid, which it can sometimes be incorrectly described as.

 How to Avoid Market Scams

Being aware of the types of stock market manipulations out there is crucial, in terms of avoiding falling victim to the many scam methods currently in existence in the world of market trading.

It is important to understand that it is most common to find underhand tactics at play for those who are day traders or entering short-term positions.

The best means of protection against stock market manipulation is to think with a long-term outlook. With technology continually developing and scammers getting smarter, keeping track of the latest frauds will help, when it comes to making better decisions when investing.

As a general piece of guidance, market manipulation can occur anywhere and at any time. That said, it could be more prevalent in low volume stocks as they are easier to manipulate, with less money required to undertake the scam.

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