Increasing Your Financial Intelligence Series: Ways the Prices of Security Are Being Manipulated

Five years ago, I would not have given it any thought.

In fact, if I come across finance terms, I would hardly give it a glance.  Worse, it would not even penetrate my consciousness.  I would not even see it, period.  But it is true what they say.  What you do not understand or know at first, if you keep at it, it would have no choice but take on meaning.

With a little help from Investopedia and the Securities and Regulations Code (SRC), let me share with you the ways by which the prices of securities (stocks, for our purpose) can be manipulated.

Do not be fooled.  The business of stocks or securities is serious business.  The big boys make the stock market their playground, their very own money mill, if you please.  If you are not careful and fall prey to their schemes, well, you can kiss your hard-earned money goodbye.

But the point of education is to make you more aware of the pitfalls.  Half of winning is knowing.

Here are some ways people may take advantage of you in this market:

Painting the tape – engaging in a series of transactions in securities that are reported publicly to give the impression of activity or price movement in a security.

Investopedia explains Painting the Tape

Painting the Tape is an illegal action by a group of market manipulators buying and/or selling a security among themselves to create artificial trading activity, which, when reported on the ticker tape, lures in unsuspecting investors as they perceive an unusual volume.  After causing a movement in the security, the manipulators hope to sell at a profit.

Hype and Dump (also Pump and Dump) – engaging in buying activity at increasingly higher prices and then selling securities in the market at the higher prices.

Investopedia explains Pump And Dump

Traditionally, this type of scheme was done through cold calling, but with the advent of the internet this illegal practice has become even more prevalent. Pump and dump schemes usually target micro- and small-cap stocks, as they are the easiest to manipulate. Due to the small float of these types of stocks it does not take a lot of new buyers to push a stock higher.

Claims about how a stock is set to break out should be met with a considerable amount of caution. It is important to always do your own research in a stock before making an investment.

Wash Sales – engaging in transactions in which there is no genuine change in actual ownership of a security.

Investopedia explains Wash Sales

A Wash Sale is an illegal transaction an investor makes by simultaneously buying and selling a security through two different brokers, thereby creating the illusion of activity. Investors do this to try and recognize a tax loss without actually changing their position.The effectiveness of this strategy has been greatly diminished with the implementation of the IRS 30-day wash rule, where a taxpayer cannot recognize a loss on an investment if that investment was purchased within 30 days of sale (before or after sale).

Boiler Room Sales – the use of high pressure sales tactics to promote purchases and sales of securities.

Investopedia explains Boiler Room Sales

A broker using boiler-room tactics gives customers only positive information about the stock and discourages them from doing any outside research. Boiler-room salespeople typically use catchphrases like “it’s a sure thing” or “opportunities like this happen once in a lifetime”.

Boiler-room methods, if not illegal, clearly violate the National Association of Securities Dealers’ (NASD) rules of fair practice. The North American Securities Administrators Association estimates that investors lose $10 billion a year – roughly $1 million an hour – to investment fraud promoted over the telephone.

Daisy Chain – a series of purchases and sales of the same issue at successively higher (or lower) prices, by the same group of people with the purpose of manipulating prices and drawing unsuspecting investors into the market, leaving them defrauded of their money or securities.

Investopedia explains Daisy Chain

Investors who do not look carefully at a stock are the usual prey of a daisy chain. As a stock rises due to increased volume, investors who didn’t do all their homework may be attracted to the stock because they want to participate in the rising price. These investors are typically caught owning a stock that continues to depreciate long after the daisy chain sells out their positions for a profit.

Manipulating price is typically very difficult in stocks with heavy volumes, so those stocks with low liquidity are much more susceptible.

Be patient.  These words and terms will take on more interesting hues.  And gold may be on your horizon.

Be rich,


Article by Issa. Art by D. Copyright 2009.
Email: [email protected]

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