Stock Rigging and its types | Investing Rules to follow to not get rigged
Often, we come across websites or videos that claim to follow their stock tips / trading advice to earn a return of 20-25%, and retail investors fall prey to this trap. However, this is usually to artificially increase/decrease the stock price for the benefit of operators. Retail investors should be aware of this and safeguard themselves from such strategies. In this blog, let us discuss what exactly is stock rigging and how one can avoid it.
What is Stock Rigging?
Types of Stock Rigging
There are mainly two strategies of stock rigging as shown below:
1. Pump and Dump strategy
- It is mainly applicable for small and mid-cap stocks where the trading volume are comparatively lower than large cap stocks.
- Operators are mainly speculators and manipulators who manage the stock prices for their own benefit.
- In pump and dump strategy, operators create a fake optimism about the stock by running various promotional campaigns on social media, new forums, etc.
- Most of the times, promoters are also a part of this strategy and they also paint a rosy picture by announcing huge deal wins, future plans, new product launches, etc.
- Retail investors get trapped in this and start buying the stock , thus pumping up the stock price.
- Once the stock prices reaches a particular target level, operators and promoters start dumping their shares and the share price reaches earlier level.
2. Short & Distort Strategy
- This strategy is exactly opposite of Pump and dump strategy. However in this strategy promoters do not take part. Only operators opt this strategy.
- Here, at first operators short sell the stock and then start creating a pessimistic atmosphere about the stock through news, social media, etc. They also offer prediction of bleak future outlook and low target price for the stock .
- Looking at this negative sentiment about the stock, retail investors also start offloading the stock from their portfolio which drives the price lower.
- Finally once the price reaches the lower target price, operators buy back the stock and earn handsome profits in the short sell trade at the expense of retail investors.
Rules to follow to guard against stock rigging
1. Stay Away from promotional events and stock tips
- It is always better to not trade/invest on stock tips that are given via phones calls, messages, emails or even on social media platforms.
- Instead one should invest after knowing the core business of the company, its fundamentals and future outlook.
2. Controlling the temptation to earn extra profits by trading on stock tips
- Retail investors should not blindly buy stock by just looking at the valuations.
- One should avoid companies whose valuations seem disconnected from the valuations.
- Such speculation tend to erode the wealth created by well-built portfolios.
3. Be Always Curious
- One should always try to understand the logic behind any investing advice, stock tips, he/she comes across.
- Also, be skeptical of the tips that claim to offer high returns to the tune of 20-25% in a short period of time. Remember that no one can claim to offer guaranteed returns in stock market. There is always some or the other risk involved in any investment one undertakes.
4. Do your own research
- Always verify the claims made by the company
- It is better to check if the company’s announcements of new product launches, deal wins are reflecting on its books and ultimately creating wealth for shareholders.
- Detailed research can save a retail investor from falling prey to such stock rigging strategies and thus prevent eroding the returns created by a good portfolio.