In 2017, a special court under market watchdog SEBI issued five years of imprisonment to stockbroker Ashok Bhagat, for manipulating the prices of shares of two companies — Empower Industries Limited and Highland Industries Limited. This manipulation in the prices of the share is called stock rigging. In 2020-2021, SEBI picked 94 fresh cases of disregarding the securities norms, of which 43.6 percent were suspected of market manipulation and price rigging of stocks.
What is stock rigging?
When the price of stock is subject to a sharp rise or sudden decline, it is called stock rigging. Stock rigging occurs when several brokers, speculators and different types of firms or people from corporates also known as stock market operators work together as a syndicate to move a stock price for their benefit. The stock rigging creates a sharp price difference for a short period, which generates higher profits for themselves.
Such price manipulation is generally targeted to the mid-cap stock as it is easier to influence them. New investors, driven by the idea of gaining quick gains, invest their hard-earned money to such stocks decided by few individuals and end up losing money.
How does stock rigging work?
The stock market operators select a small company’s stock from a booming industry that has low market capitalisation. These individuals convince the promoter of the company to initially invest in exchange for high returns and give the stock prices an initial jump. Now, the stock market operators force the stocks to look highly profitable by placing an equal number of buy and sell orders for the stocks simultaneously. The large volume of orders placed gives the investor an impression that there is an increased interest in the stocks, which convinces them to buy the stock, eventually skyrocketing the stock price as they anticipate a price appreciation.
At this point, when the prices of stocks are high, the manipulators sell their shares to the public and plan their exit, which leads to a drop in stock price. The sudden drop in stock prices creates panic amongst retail investors. They are unable to sell as they cannot find buyers for the shares because market manipulators had already bought the maximum shares. As a result, investors face huge losses. This is how some stock market operators use price rigging as bait to gain huge profits at the expense of public money.
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Stock rigging occurs when several brokers, speculators and different types of firms or people from corporates also known as stock market operators work together as a syndicate to move a stock price for their benefit.
Types of stock rigging
Stock rigging can happen in two ways:
- Pump and Dump strategy
It majorly happens in stocks of small and medium-sized companies since the trading volume is low as compared to stocks of large companies. In this, the stock market operators create false optimism about the stocks by running promotional campaigns on social media, talk shows, etc. They exaggerate a company’s latest developments such as deal wins, plans, new product launches, etc.
Retail investors fall into this trap of false optimism and end up buying the stocks, thus increasing the demand and surge in stock prices. Once the stock price reaches a certain level, the manipulators start dumping the shares causing a drop in its price.
- Short and distort strategy
Unlike pump and dump, this strategy does not involve promoters but only stock market operators. In this, the operators invest in stocks and sell them in the open market only to buy them back for lesser money. The moment the stock market operators sell the stock it portrays a negative impression about the stocks of a particular company. Looking at the pessimism, retail investors also start selling the stocks, eventually lowering the price. Once the price goes to the lower target price, market manipulators buy the depreciated stocks and gain good profits in the process.
How can investors safeguard themselves from stock rigging?
Below are some of the tips that can prevent investors from falling into the trap of stock rigging:
- Investors should not readily believe in stock tips that are offered through emails, phone calls, or social media platforms. One should invest only after knowing the core business of the company, its future and its fundamentals.
- Investors should avoid investing just by looking at the valuations.
- Always be sceptical of stock market tips that promise high returns of 20-25 percent in a short period. Investors should always be curious and try to find the logic behind any such dubious tips.
- Investors should always verify claims regarding a company’s announcements of new product launches and deal wins and check whether the same is being reflected in its books and creating wealth for shareholders. Thorough research can prevent an investor from falling prey to such stock rigging strategies and prevent eroding the returns created by a good portfolio.
