Devaluation of Stock

by Luke Arthur ; Updated July 27, 2017

Stock prices are influenced by many factors, some of which can lead to the devaluation of the stock. In some cases, stock prices will decline due to normal market forces, while in other cases stock prices may be manipulated by individuals who hope to take advantage of the situation.

Factors Affecting Stock Price

The market will often value a company's stock based on fundamental factors with the company. For example, when a company releases financial statements, if the company has lower-than-expected earnings for the period, it could drive the stock price down. Market sentiment can drive the price of the stock down even further when investors fear that the stock will continue to lose value and want to sell.

Manipulation

The price of a stock can be manipulated with unscrupulous activities. For example, analysts and other prominent individuals can make a company seem less attractive than it really is to try to drive the price of a stock down. This is typically done with smaller companies that have low trading volume in the market. While it can be done with larger companies, it is much harder for the scam artists to pull off.

Making Money

Scam artists who try to manipulate stock prices can make money by using these techniques. They may put a short sale order in on a stock or use stock options to benefit from the declining price. After they put in their short orders, they then try to paint a negative picture of the company so that investors drive the price of the stock down. Once this happens, the scam artists can profit from the decline.

Considerations

If the price of a stock is devalued through natural market phenomena, there is nothing wrong with this occurrence. If the price is manipulated so that the manipulators can make a profit, this is against the law. In this case, the guilty parties could face fines from the Securities and Exchange Commission. The problem is that proving price manipulation can be difficult, depending on the circumstances of the fall of the stock price.

About the Author

Luke Arthur has been writing professionally since 2004 on a number of different subjects. In addition to writing informative articles, he published a book, "Modern Day Parables," in 2008. Arthur holds a Bachelor of Science in business from Missouri State University.