Are there any legal restrictions on "artificially" changing the price of a stock?

Question

I understand that stock prices change partly based on supply and demand.

In theory, could you convince a large group of people to buy a large portion of the stock so that the price would "artificially" rise? Are there any legal restrictions on this? And would this also work in practice?

And if it did work in practice, would the following scenario be possible?

If stock A is worth 100 dollars, and you buy multiple shares of A and the price would go up slightly, then could you sell at, say, $100.01, which might cause the stock to go down, and buy it again at 100 so that you would pocket the 1 cent for each share, and repeat? If this is possible, are there any legal restrictions on this?

Answer 1

It won't work the way that you think it works. Basically, you cannot make this work out in your favor without the willing participation of the people who's money you would be taking.

The play that is illegal is where you buy a bunch of stock quietly, then deliberately mislead others into buying lots and lots of that stock to drive the price up (pump), and then sell all your shares before everyone figures out that you were misleading them (dump). You can't do this without the willing participation of the losers, that's why you need to mislead them. That's wrong and illegal, called "pump and dump."

If you try to do this without misleading anyone, it could sound like this:

Suppose that you buy a bunch of stock (and it would have to be a BUNCH) in order to drive the price up. Well, as you're buying it, it will go up, so each new batch will be a little more expensive for you than the last. Remember, you need to buy LOTS, so you can't think that you'll be able to just buy it all at one price in one transaction. It doesn't work that way.

Anyway, now the price is much higher than when you started, so you decide to sell. But once again you can't just sell it all at once in one large transaction at the higher price. You have to sell it in batches. And as you do the price will fall. You'll get a little less for each batch as you sell them. Ultimately, you'll be right back where you started, plus or minus a bit. Congratulations! You pumped-and-dumped yourself!

Answer 2

You're asking a question about legalities, but since this isn't Law.SE and since I am not a lawyer, this answer just looks at the maths and the dynamics of the situation.

The maths doesn't add up.

• Suppose your Stock A was trading at $100.

• You and your associates buy a whole bunch at $110.

• According to your scenario, the rest of the market is now willing to buy from you at $100.01, so you sell at $100.01, after which the market is willing to sell to you at $100, so you buy at $100.

After the exercise, you retain the same number of shares you initially bought, but you lost $9.99 along the way, and the share price is back at $100, so liquidating the shares at this point still yields a net loss.

You could try repeating the exercise, but lots of little losses doesn't add up to a big gain.

Even if you conned your associates into taking the $10 loss while you reaped the $0.01 gain, it is unlikely that they would fall for your shady scheme when you try to earn your second round of $0.01 gains.

Disclaimer: this is not legal advice, and this is not financial advice.

Answer 3

"Market manipulation is the act of artificially inflating or deflating the price of a security or otherwise influencing the behavior of the market for personal gain. Manipulation is illegal in most cases, but it can be difficult for regulators and other authorities to detect, such as with omnibus accounts" According to https://www.investopedia.com/terms/m/manipulation.asp#:~:text=Market%20manipulation%20is%20the%20act,such%20as%20with%20omnibus%20accounts.

This is market manipulation.