The myth
The idea that the stock market is rigged is one that resonates with individual investors and non-investors alike.
It’s fueled by past events of market crashes, corporate misdeeds, conspiracy theories, and negative media depictions that affect public perception.
This belief may leave people wondering whether they should trust a system with their hard-earned money if it can be manipulated.
The reality
At its core, a stock market is a place where people, companies, and institutions buy and sell shares of publicly listed companies. Share prices are determined by supply and demand.
If there are more people who want to buy a stock than those who wish to sell it, the price goes up, and vice versa. You can make money by selling stocks at a higher price than you bought them for, or by receiving a portion of a company’s profits through dividends.
The way it works seems straightforward enough. However, in reality, things can get complex due to all the factors that can affect the stock market as well as the players involved. Here are some issues that may arise:
- Unlawful behavior
Crimes can happen whenever and wherever there is an opportunity to make money, and financial markets are no exception. Illegal practices like insider trading and price manipulation shake the public’s faith in the fairness of financial markets.
- Uneven playing field
Stock market participants include not only individual investors but also institutional ones with relatively more money and tools at their disposal than the everyday investor.
Some argue that these larger participants have a lot more influence and better opportunities since they can make bigger trades. They believe the playing field is not level for retail investors with comparatively limited resources.
While there are valid concerns about certain practices, it's important to also keep these in mind:
- Regulation and transparency
To protect investors, regulatory bodies like the Securities and Exchange Commission (SEC) and Capital Markets Integrity Corporation (CMIC) enforce strict laws against insider trading and other illegal activity.
Public companies are also required to issue financial statements, regulatory reports, and other relevant disclosures as part of their duty to maintain transparency and keep investors and regulators informed.
- Growing opportunities for retail investors
The internet is seen as an equalizer that makes investing accessible to more people than ever before. There are platforms and programs that allow retail investors to participate in offerings that were previously out of the reach of smaller investors.
- The importance of strategy
Even without bad actors, investing in the stock market still comes with risks. Following a sound strategy can help you stay on track with your goals even as you face uncertainties.
Let’s say your plan is to invest long-term in companies with good prospects. Any short-term fluctuations in price may not matter much to you, whether they’re due to normal trading activity or malicious attempts to artificially change prices.
Fundamentally-sound stocks have the potential to grow over the long term and help you meet your goals despite the risks.
Diversifying your portfolio can also give you an additional layer of protection since you won’t rely on just 1 or a few investments to possibly grow your money.
Verdict: Mostly false.
There are valid concerns about market fairness and manipulation, but the stock market is ultimately influenced by different factors that no individual or group can fully control.
Regulations are also in place to prevent fraud and abuse. Additionally, there are things you can do as an individual investor to prepare for the unexpected to try to meet your goals.
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