How to Legally Manipulate Stock Prices

Institutional Investors Can Move Stock Prices to Their Advantage

Businessman using graphs on screen
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Manipulating stock prices legally is actually fairly easy.

The problem for individual stock investors is they don't have ready access to these techniques and, consequently, often end up on the losing end of these schemes.

Here's what happens, although there are many ways to accomplish the same result:

A big institutional investor (hedge funds, mutual funds, insurance companies, and so on) picks a stock that it owns and begins selling.

As it dumps the stock on to the market, the price begins to fall. Other investors unload the stock and the price continues to fall.

At some point, the institutional investor decides it is time to jump back in and it begins an aggressive buying program. Soon, other investors notice the price rising and they buy also pushing the price up higher.

Once the price is sufficiently high, the cycle can begin again.

What has happened is the institutional investor through its purchasing power can drive prices down and then buy back into the stock at a low price.

It rides that price up as others join the rally and pockets a hefty profit.

This is called the slingshot effect and was described in a much-quoted article back in 2009 by Jason Schwarz. He was referring specifically to Apple stock.

However, this happens with other stocks too.

The lesson for the individual investor is to never count on short-term gains in a stock, because those could evaporate for no apparent reason.

If you have a good profit in a stock, take some off the table by selling part of your holdings.

This way if the stock is used in a manipulating scheme or something else happens that causes the price to fall, you have captured part of your gains and avoided some loses.