What is High Close?

Key Highlights

• Using the high close strategy for market manipulation might pose legal risks if it is misused.

• The high close strategy involves buying stocks at an elevated price in the final minutes before the market closes, artificially inflating the closing price.

• The high close strategy is frequently applied to stocks with low values, limited trading activity, and uneven information, especially around the end of quarters or months.

Understanding High Close

A high close in stock market is observed at the end of a financial market's trading session, representing the price of the last trade before the session concludes. These closing prices serve as the basis for traditional line stock charts and are essential in calculating moving averages. The majority of manipulative activities associated with high closing tend to occur towards the end of a month or quarter.

Given the widespread attention given to closing prices, traders may manipulate them to create the illusion of a stock rally. This manipulation, referred to as a high close in stock market,it is particularly common in micro-cap stocks with limited liquidity. Additionally, closing prices can artificially inflate the values of stock derivatives associated with them. This practice extends to mutual fund net asset values, which are also determined using closing prices.

How Does High Close Work?

Stock manipulation involves the artificial inflation or deflation of a security's price, and the high close in stock market is one such strategy employed in this illegal trading activity for personal gain. Despite being illicit, these manipulative actions are challenging for regulators to identify. Manipulators typically target stocks of smaller companies, as manipulating their share prices is comparatively easier. Penny stocks are more frequent targets compared to medium and large-cap firms, which undergo closer scrutiny from analysts.

Apart from the high close, other manipulation techniques include the pump and dump technique. It is also the most commonly used method that artificially raises a micro-cap stock's value and then sells off, leaving subsequent investors with losses. Another manipulation strategy is the poop and scoop, the opposite of the pump and dump, which might be less common due to the greater difficulty in tarnishing the reputation of a reputable company compared to inflating the reputation of an unknown company.

Example of High Close

Imagine company ABC's stock commencing the trading day at ₹0.30. Over the past ten weeks, its closing price consistently stood at ₹0.32. Trader XYZ enters the scene, taking a position in ABC and speculating that its value will surge to ₹1 in the coming weeks. Capitalising on the limited liquidity of ABC, XYZ strategically acquires substantial amounts of the company's stock in the final minutes before the stock market closes.

This move results in pushing ABC's price to ₹0.60. With a remarkable 100 percent increase, ABC's stock price captures the attention of other micro-cap stock traders, leading them to join in after witnessing the notable price surge. The following day, XYZ sells ABC in the market, only to repurchase it at the end of the day. This high close strategy is repeated for two consecutive days, attracting more traders to invest in ABC. After this two-day period, the price of ABC effortlessly surpasses the ₹1 mark.

Avoiding Losses During Market Manipulation

Investors should stay vigilant to prevent losses from market manipulation by employing the following strategies.

1. Fundamental Analysis Before investing, it's crucial to conduct a thorough technical and fundamental analysis of a security. Some economists argue that relying on fundamentals can mitigate the impact of high close manipulation.

2. Candlestick Charts When analysing micro and small-cap securities, investors should exercise caution with closing prices. Instead of solely relying on closing prices, consider using candlestick charts and other indicators in combination.

In India, the Securities and Exchange Board of India (SEBI) closely monitors and regulates market manipulation activities. Entities or individuals found guilty of such practices may face fines or be barred from trading in the market.

Conclusion

The high close strategy in the stock market is a subtle technique that is not easily detected. Adequate monitoring and regulation are crucial to prevent such manipulation. Investors are advised to exercise ample caution when making investments. As investors venture into the dynamic realm of the stock market, a comprehensive understanding of High Close and its implications is key to making informed and correct investment decisions.