How Stock Market Rumours are Spread by Operators to Change Stock Prices?

Stock Market Rumours

According to Merriam-Webster dictionary, a rumour is - a talk or an opinion widely disseminated with no discernible source and a statement or report current without known authority for its truth. With the tremendous development of information technology and telecommunication, where countless websites, as well as chat rooms and forums, provide information on endless topics, we can find more and more opinions, estimations and predictions of investors and private analyst concerning publicly traded stocks at these locations, which can be described as rumours. The number of rumours has increased significantly during the last years.

The question of whether trading based on a particular set of information can lead investors to obtain abnormal returns continues to receive attention from researchers and investors. A vast majority of these studies on analysts’ recommendations and stock market rumours reports statistically significant stock price reaction to the publication of information and, hence, concludes that information has value.

The short time available for decision-making creates a sense of urgency and an incessant search for information that may reduce uncertainty. This causes investors to be susceptible to rumours circulating in the financial market that often arise as a way to fill the void of knowledge caused by the lack of information. The financial rumour, unverified information on the performance and financial situation of publicly traded companies, is also speeded up and gains more credibility when reported in the press which often publishes information that has not been confirmed with official sources.

As part of the policy for information transparency, companies are obliged to disclose any material fact that might occur. Thus, when news contains information that affects a company's securities and the company has not yet released it, the stock exchange requires this company to provide clarifications to the market. Though, until the company comments it, the rumour may gain credibility among many investors, especially those with a greater appetite for risk, generating more speculation and price fluctuation as official sources are slow to respond.

Big players can manipulate stock prices. There are various popular and fastest ways big investors spread rumours in the stock market.

These rumours suddenly push stock prices higher or lower within no time. But it can cost heavily to the portfolio of small investors who get trapped in the wrong direction.

According to an interview with Jim Cramer published in TheStreet, stock market manipulation is a fact. Hedge fund managers can push stocks higher or lower with as little as $5 million in the capital.

He described that one of the best strategies to keep a stock price down is to spread false rumours to reporters. Big investors often manipulate stocks by creating shorts.

It is even true for fundamentally strong stocks to shake weak hands before a good upside. Small investors should always remember that chasing rumours is a fool's game. However, it is great for media headlines to lure the public.

SEBI should spend more time thinking of ways to stop these false rumours that do rounds in the market.

One of the fastest and most significant ways big investors spread rumours in stock markets is through opinions of credit rating agencies. They are reputed agencies that determine the creditworthiness of bond or debt issuers. Some of the biggest credit rating agencies include Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings.

Their primary role is to rate the risk of defaulting on debt and other credit-related securities. This information is considered useful for individual and institutional investors. It helps investors make profitable decisions in bonds or securities.

According to a post published in Investopedia, these rating agencies truly failed in their roles of providing accurate credit ratings on a timely basis.

It is perhaps due to potential conflicts of interests or serious mistakes in the model of issuing ratings for securities. This business model requires issuers to pay credit rating agencies to rate their securities.

This could adversely affect the authenticity of the outcome of the rating process. Similarly, these agencies are slow to catch corporate frauds or attempt to hide liabilities on balance sheets.

Thus, investors should not rely solely on their opinions as operators can misuse them. They should perform their diligence in determining safety levels of debt and related securities.

Another quick way big investors spread rumours in the stock market is through a stock upgrade or downgrade. Stocks are often upgraded or downgraded by investment bankers.

The stock upgrade can significantly boost the confidence of small investors. This could perhaps slide the share price in bearish markets.

Some of the most popular investment bankers in the US are Goldman Sachs, Morgan Stanley, JP Morgan, Bank of America, Merrill Lynch and Deutsche Bank.

These bankers are financial institutions whose role is to raise capital for companies. They are also involved in providing mergers or even sale advice on specific transactions. They are virtually behind major financial decisions that move the stock markets. It is usually lesser-known to the general public. They are also actively involving in buying and selling of securities from time to time.

Their interests are related to the stock price of a company. Thus no one should solely rely on their views about a given stock as speculators can misuse them.

Investors should always be cautious in the stock markets to avoid losses due to wrong decisions.

Stocks Analysts views or tips are the most common way big investors spread rumours in the stock markets. Stock analysts are one of the most respected advisers in the market. They usually provide stock market tips through various sources of media. They are particularly liked by new and unskilled traders.

It is the right decision to take advice from the best stock experts or analysts. It is since they are actively involved in evaluating a wide range of companies. They have access to round the clock market news and online resources. Generally, they are known to have credentials but they are not all the same.

Some analysts will recommend buying while others will ask investors to sell the same stock. Investors should never forget to consider their track record before following their best stock tips.

But, due to human nature, even the best stock analyst can provide fake reviews or tips. It is perhaps due to the influence of big investors or operators.

They are an easy target of speculators to spread rumours among stock investors. Thus, one should never hesitate to ignore stock experts whose views or tips are very far from reality.

Another fast way of spreading rumours in the stock market is real-time news or recent articles. Investors are quite smart in this digital era. They love to tract their favourite stocks through various sources of media. Some of these sources include real-time news or recent articles.

They are highly valuable sources of information to make quick decisions. But every news feed or article is not as reliable as the company’s announcement. Fake news or rumours can also be published by various reputed online sites. It is perhaps done in an attempt to attract huge traffic within a short period.

Sometimes these online sources are also a cheaper source for operators or big speculators to spread rumours. Investors need to remain updated with all the latest information can adversely affect their decisions. These rumours can force investors to cut positions even in good stock. Or it might even induce investors into buying a bad stock at a higher price.

Stock specific message board are another such way for a big investor to spread rumours.

Investors or even traders often spend valuable time in stock related discussion boards or forums. These are the most valuable sources of information to know market sentiments, investor’s views, their stop loss levels, trading strategies and much other stock related news and information.

Big speculators never share their views with small investors but they can easily know about what is happening in the minds of small investors. They often get registered on these message boards to spread rumours quickly. For instance, if they want to accumulate shares of a company, they will spread negative rumours. Similarly, if they want to distribute their shares, they will spread positive rumours.

Anything that is repeatedly published several times in a day can adversely affect the sentiments of investors. Therefore, they should always do their due diligence before making a decision. They should stay away from stock market message boards. They should not follow the tips of unskilled investors even if they are gold, silver or platinum members of such message boards.

Another such way of spreading rumours is through interviews of company management. Every board of director has invested in their own company. They have a varied amount of share ownership.

Their interest is affected by the stock price. They earn money from profits of the company, salary benefits and even trading.

They are often the first to know what is happening in the company on the ground. If they want to accumulate shares of the company, they can easily spread negative rumours.

They often spread negative rumours by providing interviews to major media houses, hiding positive developments, ignoring project orders, capacity extension plans and more such information.

Similarly, if they want to distribute shares of their company, they will spread positive news. They will highlight every small positive step to attract investors.

We cannot stress this enough that it is extremely important for investors to do their research and not rely on information that exits.

Brokers are also bearers of rumours. They are usually of two kinds- Discount brokers and Full-service brokers.

Discount brokers are the ones that are only responsible for trading on behalf of their clients. Whereas, full-service brokers are the ones that provide investors with a variety of featured services.

Some of these services include advisory dealing, discretionary dealing, tax preparations and many such services. These services can make a full-service broker more influential among their clients.

A broker who is acting under the influence of operators or company promotors can sometimes provide wrong recommendations. It is an easy means of targeting unskilled investors or traders. They may provide them with fake reports to recommend investing in bad stocks or avoiding good stocks.

Therefore, circling back to my original point, Investors should not go by their brokers advise blindly, and do their research.

A lot of reputed personalities use social media. Some of the popular social media platforms include Twitter, Facebook, Medium, Tumblr, Linkedin. But hacking of the accounts of these reputed personalities is also increasing.

Hackers post information which might taint investor decisions and induce them into making decisions that would harm investors interests. A single tweet from one important personalities account has the power top wipe out billions from the stock market.

Thus, investors should not believe anything without confirming it.

Another major way of market manipulation is through circular trading.

Circular trading is a fraudulent scheme where sell orders are entered by a broker who knows that offsetting buy orders for the same number of shares at the same time and, at the same price, have either been or will be entered.

Such a trading scheme does not represent a real change in the beneficial ownership of the security. Circular trading artificially inflates volumes as a way to show that security has liquidity, maintain share price at the desired level, and to act as proof that there is market interest in the stock. The practice is banned and illegal in numerous countries.

Some initial public offerings (IPOs) and penny stocks may be especially susceptible to circular trade schemes, particularly if certain shareholders want to create the appearance of intense trading activity and buzz surrounding a stock. The intention is to encourage the stock to be pumped up, driven by the attention the cycle of trades attracts. A circular trading scheme typically requires several participants to create the illusion of shares being acquired by new owners when, in fact, the same shares are simply passed through with no actual change in value.

Day traders might fall victim to such a scheme if they are looking for new investment opportunities, see volume activity on a stock, and buy into it expecting the shares to escalate in value.

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