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Stock
Manipulation and Trading Scams
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. # # # # # SolveYourProblem.com : 2007
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