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 is actually fairly easy, and it's done more often than you might think. Achieving it in a perfectly legal way is no more difficult.

The problem for individual stock investors is they don't have ready access to these techniques and, consequently, they often end up on the losing end of these schemes. This is one of those situations where a little knowledge can go a very long way.

The Basic Process  

There are many ways to accomplish the same result and this one is pretty basic, but it works and it's relatively simple to accomplish. Here's what happens. 

Let's say that a big institutional investor in hedge funds, mutual funds and insurance companies zeroes in on a stock that it owns and it begins selling. As the investor dumps the stock onto the market, the price will naturally begin to nosedive. Other investors might panic so now they begin to unload the stock as well. As a result, the price continues to fall.

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

The cycle can begin again when the price is sufficiently high, and it often does. 

What Happened Here?

What has happened is that an institutional investor, through its purchasing power, has the ability to drive prices down then buy back into the stock at a low price.

It rides that price up as others join the rally and it pockets a hefty profit as a result. This is called the slingshot effect and it was well described in a much-quoted article by Jason Schwarz back in 2009. He was referring specifically to Apple stock.

Is it legal? Yes. Can you ride the wave, too?

Maybe, but more important, you can learn a lesson from it. 

What's in It for an Individual Investor?

This same scenario happens with other stocks as well, and there's a lesson here for individual investors. The lesson for the average investor is never to count on short-term gains in a stock because those could evaporate very quickly for what appears to be no apparent reason. You can count on there being an underlying reason, however. You just might not know what it is at the time.

If you have a good profit in a stock, you might want to consider taking 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've captured part of your gains and avoided some loses.

Note: Always consult with a financial professional for the most up-to-date information and trends. This article is not investment advice and it is not intended as investment advice.