Stock Manipulation may mean heavy losses for the retail investors. To be very honest it is very difficult for retail investors to find out stock manipulation. The best example in recent past i can think is of Surana Solar. I shared a dedicated post on the same, 5 Lessons from the debacle of Surana Solar. It is a case study why retail investors should stay away from such stocks.
In my previous post in stocks section, i discussed stock price manipulation – Pledging of Shares is the key culprit. In my opinion, stock manipulation linked to the share pledging is organized and well thought through. The 2nd culprit is Speculation and it is another name for stock manipulation. A retail investor cannot keep a tab on so many parameters. Therefore, i cannot expect the retail investor to be proactive in his / her approach to finding out stock manipulation.
As we agree that retail investor can be reactive. Therefore, it is crucial to identify the stock manipulation at an early stage to avoid huge losses. Once the stock is in the grip of operators then there is NO bottom / floor of the stock. In my earlier posts, i shared references of stocks wherein investors lost 90% wealth in a single stock. The recent example is Welspun India wherein investors lost 50% value in just a few days. Let’s check out how the retail investor can find out stock manipulation.
How A Retail Investor Can Find Out Stock Manipulation To Avoid Loss
1. Sudden change in average trading volume:
The average volume data for each stock is available in public domain. Some websites provide this data for 5 days, 10 days and 30 days average volume. 5%-10% variation is normal but in terms of any sharp change in the average volume should raise your eyebrows. You can check the reasons for the same. If there is NO Reason for sudden change in volume then be assured something is cooking up. The change in average volume may or may not accompany by a change in stock price to avoid suspicion.
Besides overall volume, you should also keep a watch on Security wise delivery position. High delivery volume shows faith of stock investors. On the other hand, low delivery volumes mean speculative activity. Therefore, sudden decrease in the delivery % is not a good sign. As i keep highlighting that always remember that market / brokers / money makers know much more than retail investors. In the majority of cases, the retail investor is only a mute spectator.
2. Unexplained stock price movements:
The biggest mistake committed by the retail investors is that they generalize certain rules. For example, movement of 5% in stock price is considered as sharp stock price movement and a sign of stock manipulation if it is consistent. The operators take advantage of this misconception. In my opinion, stock price movement is a trend and sharp stock price movement is relative in nature. This may vary from stock to stock basis.
To share an example, The Stock A was on my radar for 6 months. There was not much movement in this stock and daily movement was maximum 0.5% on either side. Suddenly one fine day, i observed a price movement of 2% in this stock. In my opinion for stock A, 2% movement is sharp movement considering a daily average of 0.5%.
On the other hand, there was another flamboyant Stock B. The average daily movement was 2% on either side. Now for this stock, a movement of 5% once in a while will not raise any hackles. But a movement of 10% in Stock B means something is fishy.
Therefore, retail investors should first know what is the definition of sharp stock price movement for a particular stock. If this movement is unexplained then it implies that stock manipulation might be at play. In other words, the stock is now operator driven stock :).
3. Permanent Members of Manipulation Club:
If you are regular stock investor then you must be knowing that some stocks are permanent members of manipulation club. They were listed on exchange only for stock manipulation. Trust me there are some known names also. Respectfully sometimes of these stocks are referred as trading stocks. To clarify, all trading stocks are not a member of manipulation club.
The stock investors should be beware of habitual offenders i.e. favorite stocks of operators for stock manipulation.
4. Weak fundamentals:
A strong performance by fundamentally weak stock is a sign of stock manipulation. In my post, Fundamental vs Technical Analysis of a Stock i shared that as a retail investor i vouch for fundamental analysis. The probability of losing money in a high volume stock with strong fundamentals is low compared to technically strong stock. Stock Market operators can influence your decision and ultimately you may become the victim of stock manipulation. At the macro level, you should not invest in a stock with weak fundamentals.
You should always compare the fundamentals of the stock with peers and sector average rather going by the general rules. In one of my future posts, i will discuss stock specific ratios you should consider to compare the fundamental strength of the stock.
5. Keep a tab on Business newspaper, SEBI and NSE websites:
Though this approach is reactive but you can keep a tab on websites of SEBI and NSE for order / complaints related to stock manipulation. You can also find this information in business newspapers. One such order issued by SEBI is as follows
http://www.sebi.gov.in/cmorder/vakrangee.html
In many cases, i observed that news provide a credible clue on stock manipulation. For example, speculations related to mergers and acquisitions etc. Therefore, it is important for retail investors with direct equity exposure to stay updated with latest news and happenings.
Last but not the least, you should not buy / sell any stock just based on the stock market tips. At the macro level, if you are an investor then you can rely on fundamental analysis. On the other hand, the traders can rely on technical analysis. The intermittent ups and downs will always be there.
Words of Wisdom:
As a retail investor, you should always invest in fundamentally strong large cap stocks. Stock manipulation is very rare in such stocks. Even if you are stuck or trapped in manipulated stock/s then you should immediately exit and cut losses. The hope of recovery of loss from manipulated stocks is similar to expectation from me to win a Gold Medal in Olympics :).
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Thanks sir