General Question

lifeflame's avatar

How do big companies manipulate stocks for profit?

Asked by lifeflame (5805 points ) March 19th, 2008

I’m trying to write a play, and in it there’s a scene where a character boasts how he managed to manipulate the stocks for his company, outwit the competitors and haul in a huge profit. What kind of dirty tricks can big companies pull (at the expense of their competitors or the average joe?)

Details and examples, please…

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12 Answers

MrKnowItAll's avatar

Buying a republican usually works.

gailcalled's avatar

Do some research on insider trading or how and when corporate executives unload or buy large blocks of stocks in their own cos. You can do the research. I am too busy.

lifeflame's avatar

Thanks gailcalled.

I did read some stuff on insider trading. But it’s quite theoretical and I wonder if anyone has actually any anecdotes / is someone who is familiar in the field that can share a little bit about how one plays with people’s expectations to make money

It doesn’t have to be illegal either; just “the way the game is played”...
I’d also like to hear from people who bought stocks and somehow got screwed…

richardhenry's avatar

If someone had access to knowledge about a companies upcoming activity that was not publicly available, this could be used to their advantage at the expense of others in order to play the stock market.

richardhenry's avatar

Perhaps Google for the Apple, Inc. options back-dating scandal. That’s an interesting — and fairly hairy — topic.

srmorgan's avatar

In your example you talk about manipulating a stock, outwit competitors and rake in a huge profit. Price manipulation would not really involve outwitting a competitor and raking in a huge profit could mean earning a profit through ordinary business dealings or by selling stocks at the right time. Which do you want to consider?

As far as “influencing” a stock price goes there are legitimate ways such as having a good quarter, beating the earnings estimates forecast by stock analysts who are following the stock, having the corporation announce a stock buyback plan in which the company would repurchase outstanding shares on the open market, thereby reducing the number of shares outstanding and boosting earnings per share which would generally increase the stock price. But these are all common and legal methods and really not really good subject matter for your story.

The Apple options scandal really did not involve manipulating the stock price, but rather involves how the company priced the stock options available to certain employees with the end result allowing them to purchase shares well below market prices.

Since the passage of Sarbanes-Oxley several years ago the penalties for monkeying with financial results of public companies have become quite severe and manipulating results is more of a gamble for CEO’s or CFO’s because there is the threat of fines and jail time.

I am not sure how this would fit into your plot, but you could do a little research about people who :short” stocks which is essentially betting that a stock price is going to sink. There are occasionally reports in the press about investors squeezing companies to get the stock price to drop and profit from that. A google search on shorting stockos might be productive for you as would a reading of some back issues of the Wall Street Journal or the New York Times.

SRM

jamms's avatar

http://en.wikipedia.org/wiki/enron

Try making something up. If it sounds believeable people will accept it.

justin's avatar

If you have insider information – good or bad, you know what way you can expect the stock to move when the information goes public. Letting people know this information so that they can trade on it before the public is illegal, but gets you ahead of the swing in stock price – buy if it will go up, sell if it will go down. Misinformation will alternatively screw people if they trade on incorrect speculation.

lifeflame's avatar

hey thanks guys…
for srmorgan for this detailed answer and respondants in general for givign me jargon + pointers on where to search.

Snoopy's avatar

Porsche is apparently very experienced….

See this link

Urban's avatar

Aside from insider trading, what companies will do is find loop holes in the accounting system and the accountants are essentially responsible for creating financial statements or at least auditing them to confirm they’re right. Though I do want to clarify that a company won’t actually make a profit (individuals will); they’ll typically make their stock more attractive, which drives the market price up as demand for that stock increases, then the execs can sell their stock at an artificially inflated price – depending on their vesting options.

Talk to an accounting friends/student/professional for different ways this is done. In all the accounting classes, they tell you how to do this so you know what to look for and can call attention to it.

For example, earnings per share is a ratio that the layman will look at (erroneously) to gauge whether or not the stock is worth buying. Earnings per share is calculated by dividing the net income by the total shares outstanding (example below). However, total shares outstanding does not include what’s called “treasury stock” (which is stock that a company buys back to limit how many shares are “outstanding”). Well, if you’re following me here…if the company decreases the number of shares outstanding, then the earnings per share will go up. So in this example, they manipulated a key ratio that will drive demand and increase the price per share. This is one of the really easy things to spot and most companies can justify buying back stock to keep better control over internal operations so it doesn’t get frowned on as much. There are way more technical ways to manipulate financial statements.

Net Income: $100
Shares outstanding: 50
Earnings per share: $2.oo

If I buy back 25 shares of stock, it becomes treasury stock and now there are 25 shares outstanding.

NI: $100
SO: 25
EPS: $4.oo

I don’t know how in depth you want it to go in your play, but hopefully this helps or at least points you in a direction. Go to a book store and just read a few pages in an accounting book to see how they do this.

There are surely other ways to manipulate stocks, but financial data altering is the most common. It’s how SOX came about.

DrMC's avatar

This is a game the whole family can enjoy. Look into the M3, and Chinese accumulation of gold. Yes, this cereal’s not just for breakfast anymore. ; )

Multinational corporations are small potatoes.

Get a good book – I like “may the devil take the hindmost” – curl up by a nice fire and read about the oldest profession.

http://www.amazon.com/Devil-Take-Hindmost-Financial-Speculation/dp/0452281806/ref=cm_cr_pr_product_top

Might not be the exact scope your are looking for, but the read is so good it’s worth sharing. Looking at modern misbehavior shows its more of the same, nothing new.

Found this on a random fling at Google:

http://m3financialsense.blogspot.com/2009/09/all-we-need-now-is-big-hit-to_12.html

The deal with commodities etc are very complex, but rest assured it’s nothing short of financial warfare.

Our own scumbags are just doing what they’ve been told implicity was OK until we decided suddenly that were were financial ethical to lure investors back to the market. This is a very very old ploy that was used in the depression and other times.

When you dig into M3, you of course need an honorary tinfoil hat, since you will become pegged as a loony right winger.

It’s Ok to be curious.

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