March 5: Common Manipulations of Consumer Investors

by David Jenyns on March 5, 2007

With the advent of online brokers, many individuals are placing themselves in the driver’s seat for purchasing stocks and bonds. The process requires a lot of research and little luck. A quick search online can bring an individual investor all the information they need in order to make those decisions. Unfortunately, there is a lot of misinformation out there regarding investing in the stock market and in reference to specific stocks. The process of manipulating potential investors to scam them out of their money has followed the stock market into the 21st century and online. Many of these manipulation schemes work on a subtle level to sneakily scam investors out of their money.

The first of such scams is called “pump and dump.” In a pump and dump scam, the basic method is for a person, brokerage or even a company itself to tout the projected earnings and growth of a company. This false projecting works to lure uninformed individual investors into purchasing stock. These purchases then push up the price of the stock in question. As the price begins to rise, the original scammers sell their stock off to new uniformed investors and retain profits. Once all the hype drives up the price high enough and the accumulation pressure disappears, the stock crashes and the investors lose money.

In many cases, company insiders will hire promoters to get individual investors involved. There are series of press release and false research reports that lure investors into purchasing these stocks. This practice is most common in the world of penny stocks. To avoid the majority of these scams, avoid investing in penny stocks. The hype associated with pump and dump scams is similar between scams. The fake press releases and research reports always tout the given company as being on the verge of a world changing technology, cure for a disease or fantastic new product. The focus is always on the glorious future of the company, but very little information is given about the company’s current status.

The second type of stock market scam is characterized by rumors and traders tricks. Manipulations of stock price can be achieved in subtle ways. Money managers have the ability to start rumors about stocks that they would like to move without paying a large price. The rumor works to lower the price of the stock and create liquidity in that company’s stock. The rumors run unchecked and spread through the market like wildfire.

For example, if a money manager wants to purchase some stock in Company A, they can start a rumor that the company is on the verge of bankruptcy. This lowers the price of the stock and allows the manager to purchase it at the desired rate. This works in the opposite way as well. If the manager wants to sell stock for Company B, a rumor can be started about an emerging invention from that company in order to inflate the stock price.

These subtle attempts at manipulation can be the hardest for investors to spot, and therefore the most difficult to avoid. Since rumors are part of the business of the stock market it is hard to track down where the rumors started.

Additionally, there is no paper trail to track down the money managers who practice this sort of manipulation. Fortunately, these inflations or devaluing of stocks are very short lived. Within a short period of time the rumors are proved untrue and the stocks bounce back to their true value. These schemes fortunately never have any long term impact on the market. Maintaining a long term investment focus of owning good companies for long periods of time will offset any of these manipulative rumors.

Unfortunately, manipulation is something that investors will have to deal with. It is part of the market and shows no signs of going away. Cheaters and manipulators exist in every industry, and are especially concentrated in an industry that is full of money like the stock market is. However, despite the presence of manipulation millions of Americans have been able to make money through sound investment strategies. By practicing diversification and researching wisely these manipulation techniques can be avoided by most investors.

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