The Ugly Truth Behind How Stocks Are Manipulated

And why penny stocks are the target market.

The stock market is weird. On one end, you have some of the smartest and most talented individuals perusing companies to extreme measures. On the other, there are a bunch of stocks that nobody usually cares enough to even look at it.

And at this end is where all the monsters like to hunt for their prey. These are some of the dirtiest and sketchiest companies to ever exist.

The way they make money is not by selling products, it’s by selling their shares to regular investors. If I’m being honest, sometimes I feel like these companies are geniuses for coming up with this business model to generate their income.

Is that legal? Borderline.

Is that ethical? Definitely not by a long shot.

Background story

Mostly, companies who would pursue this undertaking are the companies that are cash strapped.

That is because when a company has insufficient cash, there is a huge chance that it will get delisted from the exchange. If this were to happen, shareholders within the company will be forced to suffer huge losses.

So, being forced against the wall, these companies will do just about anything to keep themselves afloat and fulfil the criteria of staying a listed company.

Or, in another case, there is just a shitload of money to be made doing this for both the manipulators and the company.

And what ends up happening is that retail investors are the ones who will have to suffer their fair share of losses due to the fact that they are the ones being played.

So here’s how the story goes.

The Pump

When a company wants to raise cash in a short period, there are only a number of ways that it can do this. One of the ways that they can do it is through a pump and dump scheme.

A few years back, before the movie Wolf of Wall Street came out, companies would send out newsletters to potential investors in hopes of having them buy the targeted stock. These newsletters would get sent out on a consistent basis as a reminder to buy the stock.

These days, most stock pumps come in the form of press releases.

Companies would withhold certain pieces of information regarding their latest development. They’d wait until they want to pump the stock and then release it. Some even recycle old news, in hopes that investors might think that it is new.

But having news itself doesn't mean that the stock is instantly going to surge. That’s where the real manipulation comes in.

The ingredients

To give a little context, these companies that are being manipulated often have these key characteristics:

• Small market capitalization
• Small float (number of shares available to trade)
• Cheap prices

For this example, we’ll use a stock ticker that has a 2 million float and is trading at $2.

In other words, if manipulators want to manipulate the stock, they would only need to control roughly half the float. That means in this case, $2 million ($4 million is the total float) is the amount that is needed to fund the operation of this manipulation. Truth be told, $2 million is just a drop in the bucket for these players.

Let’s bring the manipulators into the picture.

In the stock markets, there are some traders who actually do their homework and check the fundamentals of the company. So, when they notice that a company is a terrible company, they will gravitate towards taking the short side rather than the long side.

With more supply than demand at a certain price, the price inevitably drops.

At this point, the short-sellers are looking at a profit in their account. So, they can either choose to “cover” their shares and pocket their profits, or hold on longer for an even bigger profit.

Okay, hold that thought.

The nature of the market

Naturally, the market has its ebbs and flows. Stocks don’t usually go vertically up or down and there will be some form of retracement if the movement is natural.

This is where the manipulators step in.

Supposedly, a piece of shit stock should go down to 0. Any upwards spike should be an opportunity for investors that are staring at a loss to get out. Because of this, the supply of the stock should be more than the demand and the price should be heading downwards.

But the manipulators won’t allow that.

They will be sitting at certain levels, whether it's a support line or an arbitrary line, to soak up all the selling from retail traders. And I mean EVERY LAST BIT OF SELL ORDERS.

Remember: The manipulators are smart and very well-capitalized.

So what happens when there is nobody left to sell the stock and that the stock can’t go down any further? The stock goes up.

What goes on in the short seller's mind then?

Oh shit, the stock did not break support like I thought it would. I better get out now.

Well, that’s what’s going on in the professional/experienced short-sellers’ minds. What about the amateur's mind?

I can see that there is a bit of support here, but this is a piece of shit stock, so it should just sell off for the rest of the day.

Fundamentally, it should. But what if it didn’t?

Human nature comes into play now. The riskier your position gets, the less likely you’re able to control your emotions, such as FOMO, stay calm, and make rational decisions.

Manipulators rely on this fact to make their living.

When some of these short-sellers realize that they are heading for a rude awakening, the ones who are quick to take action will start to ‘cover their shares’ and get flat on their position.

Covering shares essentially means that the short-seller is buying back their shares.

So, when all the short-sellers realize that they have to get out ASAP, all of them start to hit the buy button at once. What happens when there is much more demand than supply in the market?

The price spikes. Violently.

Those who did not even pay attention to this price action will then be faced with a ‘margin call’ by their brokers. It means that their broker will call the trader and say that they will have to force them out of their position because the trader is losing too much money.

And then we get even more buying. Which then causes the price of the stock to spike even more.

Do you realize what the manipulators and insiders have now?

A smile on their face as they sell their shares at a manipulated/artificially inflated price. Pocketing in millions from the average retail trader.

This is known as an “offering”.

These companies and manipulators will then have secured another few million dollars in their bank account. And once again, they dodged the bullet of getting delisted from the exchange.

What happens next?

Okay, now that the company has enough money to show that they are making a profit. What’s next?

Well, nothing really.

They just ignore the stock as much as they want and let it gradually fade into oblivion. It’s okay because it wouldn't really affect the company, anyway.

Then comes the next warning that they’ll be de-listed. So they pick up the phone and call up the manipulators again. But one issue, though, the bid now is only $0.1. How are they going to spike the stock above $1?

Having the bid price > $1 is also a requirement to stay listed.

In this case, they would do a reverse split. A reverse split is where the company’s shares are combined into smaller amounts. To illustrate:

Before a 1 for 10 reverse split:

Outstanding shares: 10,000,000 Market price: $0.1 Market cap: $1,000,000

After a 1 for 10 reverse split:

Outstanding shares: 1,000,000 Market price: $1.0 Market cap: $1,000,000

As you can see, the market cap doesn’t change with the process of a reverse split. At its core, a reverse split is basically adjusting the number of shares and stock price to whatever the company wants.

To play it safe, they don’t just stop when the stock price is $1. They pump the price up again and then do yet another offering to raise cash. It goes something like this:

1. Get a warning letter that the stock is going to get delisted.
2. Call up a manipulator.
3. Pump the stock.
4. Do an offering. Raise the cash needed to stay listed.
5. Ignore it. Let nature take its course.
6. Get another warning letter.
7. Perform a reverse-split to have a higher-priced stock.
8. Pump it again just to be safe and have volume.
9. Do yet another offering to raise the cash needed.
10. Ignore it. Until the next time.

And then the loop goes on and on and on and on. Until one day, the SEC notices what they’re doing and delists them immediately. Either that or the company goes bankrupt first.

Either way, every time a company does this, retail investors are the ones that are being played and don’t even realize it. They end up as the victim, as these companies rake in millions of dollars after an undertaking like this.

My point is, yes, these companies are the shittiest companies in the world that don’t even make a dime selling their product. But you still have to be aware of these schemes and know how to protect your capital. These companies, their purpose is not to sell their product, it is to sell shares. That’s how they make their money.

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