Stocks you cannot bank on

Uday Chatterjee
07 June 2003

Mumbai: It is said that stock markets the world over are driven by fear and greed. Investors, when driven by fear, sell stocks and when driven by greed, they buy stocks. The catalysts who fan these basic instincts of the investors are the operators.

India, too, is no exception to this adage and the stock scams of the recent and not-so-recent past, where the operators drove the markets to frenzied heights and then to a crash, go to prove the point. Unfortunately, at the end of all these scams, it is the small investor who ends up burning his fingers.

At the moment, we are witnessing a frenzy in the public sector bank (PSB) stocks, which could lead to another crises and what is happening needs to be looked at closely. But first lets take a look at how the operators manipulate the markets. The modus operandi is called circular trading, which works as follows:

A bunch of operators decide that a particular sector, say PSB stocks, are ripe for manipulation. Operator A buys a PSB stock from the market at say Rs 95. He sells this stock to his co-conspirator-operator B for Rs 100. B then sells the stock to co-conspirator-operator C for Rs 105. C then sells the stock back to A for Rs 110. This circular trading goes on which brings about a rise in the price of the stock.

Enter the small investor, who buys the stock at Rs 110 hoping to benefit from the rise in the price of the stock. The stock price rises in the same pattern to Rs 130. At this time the operators decide to dump the stock. The price of the stock starts falling and in no time it comes down to the original level of Rs 95. The small investor is left holding the stock he had bought at Rs 110. Now, he can either sell the stock at Rs 95 or pray for divine intervention for the stock price to rise.