Understanding capital markets

Market manipulation is frequently blamed by unsuccessful investors as the major cause of their failure. Failures always find a justification for their investment misfortune by blaming insiders or major market participants.

Winners, on the other hand, recognize that their success or failure is solely dependent on their market knowledge and ability to put that information into practice.

Rather of grumbling, winners are always trying to expand their knowledge and skill set in order to better grasp how the market operates. Understanding how the market works pushes one to face harsh life realities. One of these harsh realities is that anytime money is involved, people will strive to gain an edge by legal and criminal ways. Financial market manipulation is prevalent in today's stock market, which is often legal but occasionally criminal. Knowing how to spot market manipulation gives you an advantage over others who simply ignore or deny it.

Market manipulation is not something uncommon

Market manipulation is unavoidable. Wherever active investors assemble, stories abound of the first stock trading hero Jesse Livermore launching "bear raids" and the Hunt Brothers cornering the silver market to today's stock "spoofing" and VIX rigging.

Accepting manipulation as part of the market system is the best way to think about it. We, as little investors, have no control over or influence over how the big boys play the game. Understanding that, depending on your position, manipulation may work for or against you helps to alleviate concerns about these potentially immoral or unlawful methods.

It's also important to remember that stock market manipulation is almost often done in the short term. To put it another way, it hurts day traders and other short-term investors the most. Don't get me wrong: long-term focused manipulation can and does happen. Long-term manipulation, on the other hand, may be profitable for investors since it creates price patterns that can be exploited.

Thinking long term is the greatest approach to defend oneself against stock market manipulation. Understanding the different forms of manipulation might help you make smarter investment decisions.

Five ways on how capital markets can be manipulated

False Information

The term "fake news" has lately gained popularity. In its attempts to "drain the swamp," the Trump administration has uncovered the various ways the media manipulates the news.

Large or media-savvy stock market participants have long tried to distribute false information about a business or even the entire market in order to manipulate it to their advantage. The shadowy world of penny stock promoters is a prime illustration of how false news may be used to influence stock prices.

Protect yourself from false information by verifying the source of the information before acting on it. However, be aware that the time drain from this may cause you to miss the move.

Fading the first move is one way I profit from false news. Wait for the stock to surge higher or lower as a result of the shady news before entering a trade in the other direction. Given the old adage, "buy the rumor, sell the news," the fading strategy can be extremely successful if the news is true.

Pump and dump

Pump and dump manipulation is a type of false news that is carried out by bulk email or even traditional mail. Pump and dump manipulators, who are usually associated with penny stock promoters, send out millions of glowingly optimistic proclamations about a firm in order to entice purchasers.

The "pump" happens when the general public buys into the stock, causing the price and volume to rise sharply. The promoters sell their shares ("the dump") once normal investors have committed to the stock, causing the price to plummet.

The easiest approach to avoid a pump and dump is to avoid buying equities that are rapidly increasing in value. Pump and dumps can be profited from by fading the rise higher, as described in the previous section.

Knowing when a pump and dump is happening and fading the move is a tried and true technique to benefit. Wait for the price surge to start rolling over on the chart, just like with fake news, and then short! Fading the move aligns you with the pump and dump advocate, practically ensuring a profitable transaction.

Spoofing the taps

When sophisticated short-term investors make orders in the market with no intention of having them completed, this is known as spoofing, also known as layering. Others notice the big orders awaiting execution and assume that a market whale is attempting to purchase or sell at a specific price. As a result, the investor sets a buy or sell order at the same level.

The huge order is removed from the market seconds before the market trades at the price of the large order, and the retail investor's order is filled. The market declines once the spoofer cancels the order, resulting in losses for everyone who was duped into buying.

The greatest method to defend oneself against spoofing manipulation is to avoid short-term trading. If you conduct short-term trading, you'll eventually figure out what spoofing looks like and be able to profit alongside the spoofer. This form of trading, on the other hand, is reserved for the most experienced and competent investors.

Wash trading

When a large player buys and sells the same security repeatedly and very instantly, this is a challenging kind of manipulation. The stock's volume rises as a result of the fast buying and selling, luring in investors who are deceived by the rising volume. Once again, long-term investors are unaffected by this type of manipulation.

Bear raiding

Bear raiding occurs when a major player uses massive sell orders to drive down the price of a stock. As stops are hit, the price drops, contributing to the selling.

Final words

Now you know how capital markets can be manipulated. If you want to stay safe, the understanding you have on these market manipulation methods is extremely important.