When you fly a kite, you allow the wind to lift a light paper object into the sky and push it hither and yon on the lofty breezes. When you kite a stock, you get shares of relatively low value into the airy realm of unreasonably high prices, in hopes of taking a profit before the stock returns to earth. Stock-kiting has been the preferred method of market manipulators for centuries, and remains a common practice in the supposedly transparent stock exchanges of the modern era.
Likely Victims
With their huge "float" of outstanding shares, big companies rarely see their stocks manipulated. In order to inflate the price of Apple stock, for example, a stock-kiter would have to move almost a billion shares, valued at more than $400 each as of July 2013, in the desired price direction. In addition, with the close and constant attention of investors, the media, and stock regulators on Apple, this is an unlikely scenario and one that would carry an enormous financial and legal risk if the scheme failed. For that reason, inexpensive stocks of small and relatively unknown companies make the best kiting targets.
Manipulating Stock Prices
In most cases, kiting means buying up shares of a small-company stock to drive the price up. The smaller the "float" of shares, and the lower the price of the stock, the easier this becomes. When buy orders flood in quickly, the available shares for sale at any particular price rapidly disappear, forcing brokers and market makers to scramble to fill the buy orders at higher prices. The market quote begins to rise, and an outsider gets the distinct impression that insiders know something: either the company is hiding good news or about to announce the same.
Selling Out
Kiting schemes often have a desired price point at which shares will be sold. When the kiting process succeeds in getting the stock to that target, then the sell order comes in and the kiter cashes in. The trick is not to sell so quickly that willing buyers disappear, which will drive the price down as fast as it rose. This is especially risky with penny stocks, which have a limited following of investors and are always under heightened suspicion.
Usual Suspects
Stock kiters have other means at their disposal. Anyone providing the public with financial information, such as in a newsletter or Internet blog, has a very useful tool for stock manipulation. Stock-pickers on message boards can also start rumors, either good or bad, and take advantage of the natural fear and greed that dominate the public's investment decisions. Company insiders have also been known to use official (but false) press releases and sketchy financial statements to add market value to their shares, and in fact many small companies are little more than stock-kiting schemes run from the inside. Investors should always be aware of the possibility that a sudden run-up in price may not be as straightforward as it appears.
