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Dark Side of Stock Market | How Stock Market Manipulation works? | Insider Trading | Dhruv Rathee - YouTube
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Hello, friends!
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Stock Market Manipulation.
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Insider Trading.
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How do some people exploit the stock market?
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What are the adverse effects of the stock market on a person and on society at large?
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These are things that people rarely talk about.
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But these are very common.
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That's why in today's video on Finance,
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come, let's see the dark side of the stock market.
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Don't get me wrong.
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Many of you might invest in the stock market,
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I do it too,
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so I'm not saying that the concept of the stock market is wrong,
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but the things that I'll show you in this video,
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will force you to think from a fresh perspective.
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And you'd be able to make better decisions
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when you invest your money in the stock market next time.
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Come, let's see.
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"Nifty is opening 70 points higher today."
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"Today, we have hit a new all-time high."
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"The Sensex has hit the 50,000 mark."
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"The market's in fine fettle as we speak."
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"Sensex has climbed the 60,000 peak.
It's highest ever."
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"But are you, like me, wondering
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how is the stock market constantly soaring,
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when the economy is actually going down?"
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"So this is fickle money.
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This is money that can go out once again."
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This video is sponsored by Coin Switch Kuber.
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Watch this video till the end for a special offer.
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Have you ever thought about it, friends?
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What is the need to have a stock market?
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Why do stock markets exist?
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What would happen if stock markets ceased to exist?
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There is a simple reason for it.
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Large companies need huge amounts of money for big projects.
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An amount of money that no individual owns singlehandedly.
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So, through the stock market,
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people can invest their money in the companies,
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so that the companies get the funding for major projects
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and for new innovations.
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And in exchange for that, people get a share in the company's ownership.
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It means that when the company earns good profit in the future,
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you can get a part of it too.
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But if the company incurs a loss,
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you have to bear the risk.
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This is the basic funda behind the workings of the stock market.
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But if you look at the stock market from the perspective of a common individual,
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a common investor looking to invest in the stock market,
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Suppose, you are an investor that wants to invest in the stock market.
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And you have the option of hundreds of companies.
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In which company would you invest your money?
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What would you consider before investing?
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You'd ask which company would give you the most profit.
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For the money that you'd invest,
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which company would give you the highest return on investment?
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Which company would you bet on in this gamble?
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If I tell you that I have the secret information about this Company X,
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that this company would soon get a big funding
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due to which, its stock price would increase rapidly in the future,
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so you should invest your money in this Company X.
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And if I give this secret information to you only,
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wouldn't this gamble be unfair for the rest of the people?
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Because they don't have this secret information
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that the stock price of this company will soon go up.
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Friends, this is the game of insider trading.
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Generally speaking, Insider Trading means
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making a profit by using such information,
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that is not available to the public.
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This 'Insider information' can be leaked by any insider
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whether they are the employees of the company,
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or an executive of the company,
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or the accountant of the company,
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if they use this information to invest in the stock market,
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then it would be unfair.
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It would be Insider Trading.
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And if they tell this information to a friend or an outsider that is not a part of the company,
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even then it would be termed Insider Trading.
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But it is not illegal to reveal this insider information in all cases.
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Let's take the example of a journalist.
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If a journalist is carrying out an investigation,
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and for that, he is analysing the insider information of the company,
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the earnings data or the profit data,
that aren't publicly available,
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it is legal to do so.
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Because the journalist is looking at the insider information only for his story as is his job.
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But if the journalist, during the course of his investigation, comes across the information that
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such and such accounts of the company are managed in a way that
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it can be reasonably predicted that the stock price of the company would go up or go down,
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and the journalist uses the information to earn a profit,
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then it would be Insider Trading.
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Now you'd wonder friends,
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who's checking if your friend is working in a company
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and he tells you the insider information secretly,
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and you use it to make a profit without anyone knowing.
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True, it is quite difficult to track these things.
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And for this reason, friends,
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stock market manipulation like this is very common.
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Not only in India but in the rest of the world as well.
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In fact, not only this,
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to prove this type of stock market manipulation,
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that a crime has been committed,
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is extremely difficult.
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Because there is a lot of grey area in between.
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Suppose you say that
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you got the information from someone else while travelling on the bus
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when they were talking to each other,
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that you didn't try to get this information,
you merely overheard someone else,
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then it isn't illegal to overhear the information.
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If a large company does such things,
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then think how unfair it would be for the common investors.
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Let me use a real-life example to explain this.
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Goldman Sachs' alleged Aluminum Scam.
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"The New York Times reporting over the weekend that
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Goldman Sachs is running a scheme
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to artificially inflate aluminium prices"
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"An aluminium warehouse controlled by Goldman Sachs
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holds the equivalent of a quarter of the annual North American demand for the metal
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but only offloads or distributes a required minimum of 3,000 tonnes a day.
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No more, no less.
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Whatever the demand."
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What happened is that a branch of this bank is involved in aluminium production,
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and they controlled the supply of aluminium in such a way
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that the demand for aluminium keeps on increasing
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and so does the price.
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And then the invest in the Aluminium Futures,
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because they basically can predict the future prices of aluminium.
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This was about how insiders can illegally exploit the stock market.
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But now let's look at
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the decisions of common investors in the stock market
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and their negative consequences.
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Think about it.
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If you go to invest money in the stock market,
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what do you think about?
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Primarily, most of you
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think of profits only.
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This means that the rest of the aspects are merely ignored.
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Whether the company is doing good work,
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whether the ecosystem of the company is good or not,
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whether the impact of the company on the world is good or bad,
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these things are completely forgotten by most people.
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I'll use an example.
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Suppose a company engages in cost-cutting practices
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and cuts down on the employees' salary,
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or fires some employees,
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and the other employees are working at exploitative salaries,
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doing so is good for the profits of the company,
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more money saved by the company
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means more profits.
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And the investors of the company
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see only the profits.
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So they'd consider the practices good for them.
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And they'd want it to happen.
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This would give encouragement to
the company
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to treat their employees worse.
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Or to pay them little.
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Similarly, if a company is harming the environment,
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suppose it uses harmful chemicals to produce its products
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because it is cost-effective to do so,
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enabling the company to gain more profit.
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Or they release their chemical exhaust into our rivers.
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Because processing the chemicals is expensive,
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leading to lesser profit.
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Or they literally dump garbage around us,
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because it is expensive to process the garbage.
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That is allowed within the legal limits.
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These are detrimental to the world.
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But the people investing in the company, blinded by the profits,
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wouldn't realise these things
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because they want their return on investment.
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And this leads to a major negative consequence.
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The effect does it have on the end consumer
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shouldn't be forgotten either.
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Because if the companies focus only on profits,
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they are encouraged
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to make greed-based products
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instead of need-based products.
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For instance, your breakfast.
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Often companies market their products as something that you need to have with milk,
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but actually its 70% sugar,
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or the sugary cereals that you should eat in the mornings,
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because everyone eats it.
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This impacts your health
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and obviously, the company ends up making a profit.
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But if you eat home-made food for breakfast like milk, lassi or porridge,
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no company would make a profit out of it.
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And neither would any shareholder get a return out of it.
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So often people, knowingly or not,
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end up encouraging these things while investing their money.
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The simple solution to this is that
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thinks before you invest in the stock market
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about the company, you're considering investing in.
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How are the products of the company?
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What is the impact of the company on our environment, our society,
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and on people, in general.
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Keep these things in mind.
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The next problem is related to this.
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Most people investing in the stock market,
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run after the herd mentality.
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They don't check the performance of the company themselves,
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the closing statements of the company,
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what the company actually does,
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they simply see that their friend has recommended investing in that company,
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or the company is discussed in the news
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and all the investors are talking about the company
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so they too should go ahead and invest in the company.
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How is the buzz surrounding the company?
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It matters way more than
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the actual situation of the company.
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And there is a really simple reason behind doing so.
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The more people invest in the company,
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would drive up the share price of the company.
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And the return on your investment is also increased.
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So in a sense,
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the stock market is like fashion.
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What happens with fashion?
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I'd like to wear the clothes that others around me are wearing.
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That's the trend today.
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It's the same in the stock market.
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I'd buy those stocks that are purchased by the others.
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And if the others are selling a stock, I'd also sell it.
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Consequently, the stock price or the share price of the companies
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doesn't always depend on their performance
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instead, it depends upon the company image in the market.
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And the image can be built up and taken down quite easily
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by using PR machinery
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and advertisements.
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By employing paid news and brand ambassadors.
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All of these have a psychological impact
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that can eventually influence the stock price of the company.
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Imagine I bought a lot of stock in a small company at a low price.
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And then, I go and pay news channels and print ads,
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employ PR machinery and run trends on Twitter
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that this company is about to get huge.
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Urging everyone to invest in it.
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There's a lot of positive publicity,
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because of this more people invest,
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and the stock price of the company goes up.
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I get a lot of profit and then I sell off my stocks.
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Suddenly, the stock price of the company would crash
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because I held majority shares or a significant amount of shares.
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Friends, this is known as the 'Pump and Dump' Scheme.
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First, pump the stock price into rising,
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and because you own a major portion of the stock,
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sell it off later.
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Dump it and then its stock price would go down crashing.
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Do you know what's interesting?
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The same thing can be done in reverse as well.
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Basically, you can bet on a company performing terribly in the future.
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In such cases, you can buy Shorts,
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if you think that a company is going to perform badly in the future,
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and if this actually happens,
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you can earn profits off of it.
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But imagine this,
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as I told you, Pump and Dump schemes are practised,
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similarly, if you get a Troll army,
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or use paid media systematically
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to malign a company,
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to a level that the investors lose their trust in the company,
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and its stock price crashes,
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if you had invested in Shorts,
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then you could earn profits from it.
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This is known as Short and Distort.
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Basically, it is the opposite of Pump and Dump.
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And in a country like India,
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where rumours and fake news on WhatsApp spread like wildfire,
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you can imagine how easy it is to do so.
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I'll give you a real-life example of this as well.
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In September 2018,
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the price of Infibeam Avenues' shares fell 73%
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when rumours were spread over WhatsApp
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about Corporate Governance issues in this company.
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Investor wealth of ₹92 billion,
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was wiped in one day.
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When the price of the share came crashing down.
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This wasn't an indicator of the performance of the company.
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But it did happen.
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Why?
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Because it is so easy to spread rumours
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and people work as herd mentality in the stock market.
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Pump and Dump
and Short and Distort,
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are different from Insider Trading.
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Because the criminal in Insider Trading
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is an insider or someone that knows an insider.
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They knowingly exploit price-sensitive information.
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But in these cases,
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in these cases, it is the collective public
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that acts like a herd
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and they think that they have an insider information
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when they see any false rumour over WhatsApp,
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or come across any rumours in the news
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and based on it, they take an action.
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And overall, friends, there are so many ways to manipulate the aspects of the stock market
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that it would take a 10-hour long video
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if I start listing down all the ways.
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For example, moles can be planted in a company.
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To leak insider information to outsiders.
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Media houses can be paid to defame a company.
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A giant company can control the various aspects of its functioning
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can control the supply of something
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through which they can control the stock price
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and they can invest themselves and earn profits out of it.
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Now, mix all the problems and manipulations and look at the chaos it creates.
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Imagine a company using stock manipulation tactics,
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to earn its profits.
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And since people are driven by profit-motive,
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people invest in it.
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And because people have a herd mentality,
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since one person is investing in it, the others would want to as well.
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Things worsen exponentially.
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The company earns more profits,
the stock price goes up,
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people invest more in the company.
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And as long as people are unaware of the manipulation,
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the company ultimately benefits from it.
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And such things eventually create Stock Market Bubbles.
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Shareholders, the people that have invested in the company,
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have never visited the headquarters of the company.
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They don't know much about the company,
about its performance,
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But the on-ground situation of the company
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maybe really bad.
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Often, there is corruption among the people in the company.
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They execute a scam to rob people of their money.
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And when such a bubble bursts
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regarding a large company,
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then the entire stock market crashes
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and often it may even lead to an economic crisis.
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The biggest example of it is the 2008 Economic Crisis.
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It was created by the US Housing Bubble.
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"National Association of Realtors have reported
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the worst month-to-month drop in existing home sales
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since they started keeping track in the late 90s."
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"Not in generations has Wall Street absorbed
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the number of body blows it took today."
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"The American Financial System is rocked to its foundation
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as top Wall Street institutions topple under a mountain of debt."
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After the 2008 Economic Crisis, people had raised their voices against Wall Street,
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and had even protested.
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People questioned how it could be that
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the stock market is manipulated by these large companies in their favour
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and it is the common investor that bears the losses.
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On top of it, people found it irritating that
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the government had bailed out these large companies and banks.
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Even after all they had done.
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Another interesting fact,
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it is said that Bitcoin was invented just after this.
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As a decentralised tool.
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People were fed up with the government's central control over banks and the economy.
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So it is said to be one of the major reasons
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for making Bitcoin.
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Bitcoin will not be controlled by any central bank or central agency.
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It will always be a decentralised tool,
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and will create an alternative financial system.
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The negative aspects of the stock market that I listed out in this video,
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most of them are valid for cryptocurrencies as well.
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In cryptocurrencies as well, there have been several Pump and Dump schemes
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where people hype up a random coin
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keep a major share of it with them,
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and when the price increases, they Dump it and walk away with all the profit.
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Profit-motive and herd mentality are also evident in cryptocurrencies.
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When people invest their money in it.
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But one thing is certain,
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there is little to no scope of things like insider trading in cryptocurrencies like Bitcoin,
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because it is a decentralised thing
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it is not controlled by a central company.
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So no central company can manipulate it in a way
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that stock prices are manipulated.
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Despite all these,
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I wouldn't tell you to give up investing in the stock market.
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It's not so.
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I invest in it.
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It's only that you should keep these things in mind.
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You need to be conscious about these things
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and you should know that these do happen.
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And how you can avoid them.
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Think and make better decisions.
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And if you want to invest in cryptocurrency,
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It's an awesome app.
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If you are interested in investing in crypto,
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And if you want to gain more knowledge about crypto,
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I have put its link in the description as well.
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Here, I'd like to thank Coinswitch Kuber for sponsoring this video.
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At the end of the video, I'd like to give you a final tip.
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Whether you're investing in cryptocurrency or in the stock market,
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Remember one thing.
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Don't ever take loans to invest.
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You should either have the required amount
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or a good enough savings balance,
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to invest that money.
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And if you don't have it, don't invest.
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Because while investing in the stock market or cryptocurrencies,
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this is the last and a major negative aspect.
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Often people take loans to invest
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lose the money and can't repay the loan,
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the stock market crashes,
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and then several people commit suicide because of it.
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Apart from this, the points that I told you,
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keep them in mind while investing.
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I hope you found today's video to be informative.
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If you liked it, comment below.
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On which other finance-related topics would you like a video?
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Let's meet in the next video.
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Thank you very much.
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