Naked Truth – Story about Stock Rigging

Many of us have always wondered why some stock/share rises beyond sensible limits, maybe over a period of time or sometimes in a day. This question has always been disturbing me and I was looking for some answers for it. Fortunately, I got hold over my old friend from Pune who gave me an insider's story.

Stock rigging, for beginners like me (even I was a beginner till I heard it), means artificially raising/lowering price of a stock for manipulative profits. Example might help readers understand what I am trying to say here. Say there is a stock United Airlines Ltd. (UAL) selling at Rs. 125 at a major bourse in India. What happens now is that some people, some really influential people we are talking about here, create an artificial demand (for raising price of UAL) or supply (for lowering). This leads to a rise/fall in price of UAL. However, retail investors, ones which are the most easily manipulated, are extremely off the ground here and have not even the slightest idea of what's happening behind the exchange. It might seem that the company is really a promising one, in case of rising price, or an ugly duck in otherwise case.

Now this is not that really simple as it seems. This exercise is in itself very complicated and has lot of people involved here. So let us go step by step.

1. Choosing the fish – A particular stock gets into the mind of a well established personality. Yes yes, this personality should be defined or at least exampled! He can be an influential Market Analyst or a Broker or a HNI (High Net Worth Individual) or an Institutional Investor or a Hedge Fund or any Corporate or someone else who has what is required to take a stock up and down in a matter of days with lots of substantial contacts. The reason why any stock becomes target could be some conspiracy going on against a rival company or by a company to take its own stock high up or just to misguide the market and make a profit.
   

   
   

2. Heating the pan – The next step is to get as many people in or out of your contact to recommend these people to buy or sell that stock (UAL in our case). Now here the all time hit and a must see Hollywood movie "WALL STREET" helps us to understand what exactly happens. Brokers make strong buy recommendations to buy/sell to their clients. Friends recommend. Families recommend. As a result, ticker shows UAL rising like anything.
   

1. Frying the fish – In this step we find many investment pros and gurus recommending the buy/sell on media. Be it TV, reports, websites, blogs and anything under the sun to raise the price further. All facts, true or otherwise, will be brought to the table. By this time we may have UAL selling for anything senseless, say Rs. 310.
   

1. Roasting the foolish – I should rather call it the death trap for investors like us. Because we are the ones who actually don't know what's happening out there. The news and reviews and reports make us belief we are going for a ten-bagger. So, what are we waiting for? Let us put in our money into UAL and become a millionaire in weeks. At this point, we have UAL sells say for about Rs. 450.
   

1. Ready to serve – So when all this buying is finally going to end? I mean we are not here to keep this stock where it is now. Here is where a killing is made by those perpetrators. Suddenly we find lot of bulk selling in UAL. Now this for a moment creates more buying pressure on retailers to average there stock and pile up more of this ten-bagger. Why? Because still we find news and reviews and reports saying this is a fortune-maker stock. So the stock rises again.
   

1. Gulping the poor thing – In this step, the Perpetrators are completely out. Left are the ones like us. Stock crashes like anything. There is a bear sentiment about UAL in the market. But when retailers do panic selling, we are in real danger. Stock can be expected to be at its original price or maybe much below from where it started.
   

The words of my friends made things a lot clear to me. But the one thing that kept disturbing me (please don't mind me using that phrase again as I have a habit of bothering myself every now and then), was how I can I be sure of that I am not part of any rigging drill going on. After some inside brainstorming, I came out with some solutions –

• Checking the numbers – I still believe that a company with strong fundamentals will, not in normal circumstances, require going for rigging. But if by any chance, any rival or someone else wanted to put it down on the ticker, then it is all the more beneficial for me, as I am getting a good business at good price.
  

  
  

• Looking at Institutional Investment – Here is something which might be of some use. Usually, and research also proves it, that Institutional buying leads to temporary hike in prices. But how do I know how long they are going to stay invested. So it might be an idea to stay out of stocks that have too much II got into it, more so when there is a recent heavy buying.
  

• Doing my own homework – Again and again, this is one thing that I like to share with my family, friends, audiences in seminars and all other people who dare to ask me some tip to invest in the market. Since it is your money, why should someone else work hard to make sure it would multiply, till the time you have a portfolio manager handling it. What I need from the market, its news and reviews and reports, is facts which can be very cumbersome for me to collate. And honestly, it is not a rocket science to analyse financial facts, till the time we complicate it!
  

I hope this article brings lot of things happening in the market into our perspective. Maybe you can add on to it and help retail investors like us get a more practical view of the market.