Is this legal (stock question)

Suppose I wanted to destroy my competitor’s company. I buy a few gazillion dollars worth of their stock at, say, $20 a share. Then, I sell all the stock at $1 a share, thereby causing the value of the company to go down.

  1. Would this work? and
  2. Is it legal? and
  3. Naahh. Not gonna say it. :slight_smile:

Well, what you are talking about happens all the time. It’s called a hostile takeover. Company A buys a controlling interest in Company B and whammo, company A calls the shots for Company B. Buh-bye company B. Of course, the purchasing company wouldn’t want the value of the company to decline, becuase that would be a poor use of Company A’s shareholders’ money.

Once the company got the money from the initial sale of stock whatever happens next is a gain/loss to the shareholders.
Of course, the SEC might be interested in your scheme.

Seth, I know what a hostile takeover is, but let’s assume I don’t have enough money to buy a controling share. But if I buy, say, 30%, and sell it cheap, will it screw up the company? I realize I would lose all the money I put into it in the first place.

A hostile take over occurs when a firm’s stock is undervalued relative to its potential because of poor management. That doesn’t really apply here because there’s no mention of replacing the management. Although if you really wanted to “destroy” a competitors company a hostile take over would make a lot more sense than trying to ruin the market value of thier stock by undercutting their market stock price. There are two reasons for this that I can think of.

#1 The stock market you hear of, with the exception of is a secondary market. The primary market is where a corporation sells securities to raise capital, and consequently transactions in the primary market have a direct effect on the corporation’s balance sheet. The secondary market where your transaction would take place would not effect your competitors balance sheet at all. Consequently your competitors financial health would be relatively the same as before you implemented your scheme.

#2 Even if you were able to pull off this scheme the effect wouldn’t last long. The market price of a stock is not calculated as arbitrarily is it may seem. There are several equations for calculating the value a stock based on economic factors, dividends, growth, sales, debt to equity ratio. These formulas are not always right on, sometimes each one gives you a completely different answer for the same stock but they can usually give you some idea of what the value of a stock should be. Consequenly investors will take quick notice to the extremely undervalued stock and buy it at the first chance they get. This process will then gradually drive the price back up to $20 dollars a share.

As for being illegal, I don’t know. I would assume it probably isn’t. It makes about as much sense as buying a lexus for $60,000 and selling it the next day for $3,000.

Don’t try it, your competitor will feel little or no effect from it, and your stock broker will laugh his way into early retirement.

The day after your grand move, the folks who bought the stock from you at a dollar a share will sell it at the market, which will soon go back up to very near the value you paid for it the first time. You could do it over again, of course, and make a few other people very rich too.

Rather than buying a gazillion shares from me at $20 a share and selling them back to me for $1 a share, you could just give me $19 times a gazillion. This would actually save you a lot of money on broker frees and would have the same net effect.

Let me know if you are interested; I am more than willing to help you carry out your plan.