Table of Contents
The Market Manipulation Game
After reading the title, you might be thinking that we better know what manipulation is. And how stocks are manipulated. So you are right.
But do you know, when thieves start being caught, they also improve their method. Similarly, the techniques of manipulation have also changed with time.
Let me give a small example.
Now, in earlier times, pickpockets would directly pick your pockets because you were not aware of them. By the time we realized that we had been robbed, it was too late. After this, we started being more cautious and started walking carefully in the crowd. But with time the thieves also became smarter, now they themselves shout in the crowd, “Beware of pickpockets, keep your money safe.” And in this way, we used to search our pockets to see if our money was stolen. Our money was in our pockets, and we thought we were safe. Our pockets have not been picked.
But then the thieves notice and plan and play their game. We didn’t even realize when our cautiousness turned into stupidity.
Now you understand what manipulation is? So if you think you are smart enough and know everything there is no need to read further, and if you want to know it in detail then keep reading.
Do you know that if you are thinking of buying a stock after hearing or reading any news, or following some social media, then soon you are going to be a victim of the “Pump and Dump” strategy.
You must have heard this word at some point or the other, ‘Manipulation’. This word is directly related to the “Pump and Dump” strategy. Whenever you hear about buying a cheap stock in the news or through any social media, or when someone is advising you to buy a stock whose price is very low, then there is a possibility that the stock is being manipulated. How? Let us understand.
Before understanding this, let us look at some news.
- Mr. Elvish Yadav: You must have heard his name in the news, Mr.Yadavji had tweeted on 19 December 2022. He mentioned that he had bought the stock of White Organic Retail Ltd. (WORL) At that time the stock was trading at Rs130. After that, there was a rise of about 7% in the price of stock, and today the stock is trading at Rs 7.
- Mr.Hemant Ghai: Mr.Hemant Ghai, an anchor for CNBC Awaaz, used to host a show called “Stock 20-20”. During that show, he used to advise on buying or selling some stocks. In which he mostly advised BTST (buy-today-sell-tomorrow) or intraday stocks. But a day before giving advice, he used to buy a large amount of stock from his wife and mother’s trading account. And after his advice, when people started buying it, the stock went up, then they sold it at a profit and went away. And by such wrong means he had made a profit of about Rs. 3 crores. SEBI noticed and took action against Mr.Hemant Ghai, he was found guilty and was banned from it.
- Mr. Arshad Warsi: Famous Bollywood actor, he was also accused of stock manipulation by SEBI in March 2023. In which it was told that Arshad Warsi and his wife Maria along with other people and organizations were spreading wrong news about the stock company through the YouTube channel. Common people see such news and invest their money in such companies, and by the time they realize that it is a lie, it is too late.
These are some examples that came to the notice. But actually, these manipulation techniques are more advanced and even bigger than you think. A thief is called a thief only when he gets caught. The rest of the thieves are still roaming freely in the market.
How exactly does this pump and dump work?
So how exactly does this pump and dump work? How Big Investors, Hedge Funds Manipulate Stocks?
Stock Manipulation Old Technique
Now till a few years ago, when there were no computers, there was not much technology, then it was very easy to manipulate stocks. That is, Mr.Harshad Mehta and Mr.Ketan Parekh (there are still others whose names yet we do not know) were caught and hence they became thieves. In the past, they used easy methods to manipulate any stock.
To manipulate a stock, a large quantity of stock was bought in a single day or within a week, which would cause a sudden increase in the price of the stock, and then seeing that rising price, people start investing in the stock. In this way, the price of the stock was greatly inflated, and then at some point in time, it was sold off rapidly. At that time, it took a week or ten days for the news to reach the common people that the stock was falling. And by then these big investors would have withdrawn their profits and exited the stock.
Stock Manipulation New Technique
Now when technology came, computers came, people started seeing charts, and most importantly people started selling and buying on their own. And as the technology evolved the style of manipulation also kept changing. Now the big hedge funds manipulate stocks even more intelligently.
Let me explain this with an example. Suppose these big investors, hedge funds, want to buy a cheap stock. whose price now running at ₹2 per share. They think that the worth price should be ₹20 per share. So now they don’t rush to buy it in a single day. Because buying stock in heavy quantities within a day the price may spike. And people will become cautious.
So in such a situation, they start investing in that stock slowly day by day over a few weeks to months. They buy 100000 stocks in small quantities and pump stock value from ₹2 to ₹20. Due to this, we notice the stock price is gradually increasing on the chart.
After the stock price reaches its target, now they use a smart strategy to exit their trades. Now 100000 stocks have to be sold at the target price and on the other hand the same number of buyers are also needed to execute action. And they can’t even sell in a single day. This will also scare people again.
So now they deliberately start spreading false news about that stock in the market. Like, “The stock of Rs 2 went up to Rs 20, i.e. 900% return in one month.” They spread news like the stock is soon going to be next TATA or Reliance.
And this is how fear is created inside you. Which we call FOMO. (Fear of Missing out) After reading such news, you start wondering how I did not know about this stock, or whether I delayed investing in it. We believe in them and many people immediately rush to the market and start investing in that stock.
Now when we are investing, at the same time big hedge funds and investors are getting out of it, because they just need buyers. Which they have got now. And within the next few days, they sell all their quantities. They don’t care whether a Rs20 stock goes to Rs40 or Rs 50 because their work is already done.
And at last, people like us are left in the market who do not know the real price of the stock. Then we too either left out of fear or kept sitting and hoping that someday the stock price would go up. But after a few days ultimately the stock goes below Rs2, and then we realize that we got cheated.
Stock Manipulation Current Technique
Now let us understand the next game of manipulation. People who trade or invest using Volume Indicators or other Technical Indicators, Such as RSI, MACD, Moving Avengers, and Bollinger Band. These people think that they are safe compared to others. But big players also have a plan for them.
In this strategy, the volume is increased artificially. Let’s understand this, the Hedge funds buy 100,000 quantity of stocks from one broker and sell the same quantity at another broker at the same price. Now you might be wondering what is the benefit of doing this. They neither get any profit nor loss by doing this. But still, they keep buying and selling the stock after some time interval.
Now two things happen here, first, we see the trading volume of the stock start to increase. On the other hand, indicators that are influenced by the movement of price and volume also give us a buying signal, indirectly that also influences our decisions.
Now half of their work is already done here. This is also called the Domino effect. Cause after artificially increasing the volume, traders start buying the stock looking at the volume spike, which further increases the volume. Due to the increase in volume and price, other indicators get affected and they also give buying signals.
And we don’t even know that the big players or hedge funds are already in the positions. They have already set a trap and now they waiting for the prey. As soon as the prey starts getting trapped, they exit all their positions.
Then at some point in time, we see a sharp price decline and we cannot understand how this happened when everything was fine. Volume indicators were all positive, indicating buying, yet how come the decline happened? You keep thinking and just keep thinking.
Conclusion
Now, what’s so scary about this type of manipulation is that it’s very hard to predict. It can happen at any time and you can’t tell when it’s going to happen.
Big institutions are paying influencers, using bots or media companies, to make companies look much bigger than they are.
The problem is, that a lot of people nowadays will just trust another person’s due diligence and blindly follow them. What’s even worse is that after they enter the trade, they become extremists about the stock and start spreading fake news themselves.
The only way to avoid this is by doing your due diligence and research. It’s the only way to make sure you’re making a good investment. It’s almost impossible to completely avoid market manipulation, but some practices can improve your chances.
Don’t trust anyone – not me, not a YouTube personality with millions of subscribers, not a random person on Social Media. Do your research. You can only trust yourself.
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DISCLAIMER: None of the financial information published herein should be construed as an offer to buy or sell securities or as advice in any way. All information published herein is for educational and informational purposes only and should not be relied upon as a basis for investment decisions under any circumstances. Any reader who makes decisions based on the information published herein does so solely at his or her own risk. Investors should be aware that any investment in equity markets is subject to unpredictable market-related risks.
