Retailer's Trap: How big players influence and traps retailers (2024)

In the world of investing, the stock market can be a daunting place, especially when it comes to individual investors ‘ The Retail Investors’.

It’s often said that “90% of retail investors lose money in the stock market”. But have you ever wondered why this is the case, especially for Indian retail investors? There are many reasons, but the one that stands out the most is the lack of investing and financial knowledge. This is a major problem that needs to be addressed to help more people succeed in the stock market. The root cause of this lack of knowledge is how people in general perceive the idea of the stock market, the majority of people have a rigid mindset that financial markets are not less the a betting game that requires luck, but the truth is the opposite investing requires lots and lots of research, quantitative skills, and what not and when people having such mindset comes in arena of investing they fail deliberately.

Coming back to the topic, How and why do retail investors get tricked by the big players ‘the sharks’ of the stock market? Before deep diving into the reason retailers(fishes) get ripped by the big players (sharks) we have to understand whom we are referring to as sharks in the stock market.

Market participants

From a layman’s point of view stock market is nothing but a human-made market that connects people from all over the world dealing in financial instruments. It is the centralized and regulated financial market where people create demand and supply of financial instruments.

sharks are individuals, private or public entities who have tons of spare money or resources that can make an impact on the normal flow of demand and supply of that particular financial instrument.

whereas, retailers can make no impact on the movement of price offerings in the stock market but they are widely responsible for the liquidity in the markets.

Now that we have understood who the big players are let us understand how they trap and lure retailers and make a fortune out of them. Some of these tactics are mentioned below;

PUMP AND DUMP

Sometimes, institutions may spread positive rumors or buy a significant number of shares of a particular stock to artificially increase its price. This is known as “pumping” the stock. Once the price has been pumped up high enough, they sell their shares, causing the price to drop, which can result in significant losses for small investors who bought the stock at the inflated price. This practice is known as “dumping” the stock.

BEAR RAIDS

Sometimes, big institutions try to play the stock market by selling stocks they don’t even have. This is called a bear raid. The idea behind this is to bring down a stock’s value, which can trigger small investors to sell their shares due to stop-loss orders. This can result in a further drop in the stock’s price. The institutions then buy back the shares at a lower price, making a profit from the difference.

FRONT RUNNING

In the stock market, some traders with advanced technology place their trades just before small investors place large orders. This can cause the price to move, and the traders profit from it. This strategy can be good for the traders, but not so good for small investors who may pay a higher price for the same stock.

High-Frequency Trading (HFT)

In today’s financial markets, high-speed algorithms are being extensively used by large institutions to trade stocks at lightning-fast speeds. These algorithms can rapidly exploit small price differences in milliseconds, which can make it difficult for small investors to trade fairly and effectively. Due to the high-speed trading, small investors may not be able to keep up with market changes as they happen, resulting in missed opportunities and lost profits. Furthermore, the use of high-speed algorithms can also create market imbalances, leading to increased volatility and potentially negative consequences for smaller investors who don’t have access to the same technology.

These are some ways by which big players try to manipulate the market and take advantage of the resources they have which are lacking by the retail investors.

Retailers on the other hand to avoid the stock market traps, must take charge of their investments. They must conduct comprehensive research, diversify their investments, set clear investment goals, and have a thorough understanding of the risks involved in the stock market.

This marks my first blog post and I trust that it has been informative. It would be grateful to receive any constructive feedback that you may have to offer. Thank you for your readership.

signing off,

PRAJWAL SHUKLA