Did Someone Corner the Market? Then Watch Out!

by Investing School on August 31, 2011

The term “corner the market” relates to the activity of obtaining enough shares of a particular security so that you can manipulate the price. Setting the price of such a commodity is a great advantage to the owner. Because people owning so many shares are capable of affecting market value they are carefully watched by the Securities and Exchange Commission.

The easiest way to corner a market is simply to purchase shares as they become available. The next part of the plan is to horde the shares until they rise in value. With futures trading, one purchases as many futures contracts as possible and sells them at a profit after prices have become inflated.

While there are stories of attempts at cornering just about any market you can imagine, there have been relatively few successes. Corner attempts tend to break down under their own weight. The problem with corner strategies is that the market is watchful, even without the government’s involvement. If investors note that a particular asset is being bought up, they are likely to give it more attention.

The individual, or group, attempting to purchase a decisive share runs the risk of others deliberately taking opposing actions. This can leave the holder with a great deal of stock which no one is willing to purchase. As the price begins to fall from lack of interest, the owner may very well have to unload his asset at a loss.

For a classic example of this practice you need only watch the 1983 movie Trading Places where short selling shares of cornered orange juice futures cost their rivals millions.

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