In finance, “corner” and “cornering” describe the action of buying large amounts of a particular security or product with the goal of influencing its price. However, establishing a monopoly on those assets is not in the buyer’s best interest. By cornering a market, the investor aims to drive the value of specific products or securities up by making them scarce on the market. Once the price of assets goes up, the investor sells them at a profit.
Attempts by companies or associations at gaining a leading position in their market can also be a form of cornering, if it results in limited access to the product or its alternatives. Microsoft and IBM are prominent examples of companies that have successfully engaged in cornering.
Cornering is an established strategy at some stock exchanges. Traders buy particular securities or futures in large numbers and in so doing, they severely limit the quantities available on the market. In some cases, multiple traders or investors work together to achieve the purchase volumes necessary to corner a market.
The artificial scarcity of the cornered assets generally leads to increased demand and drives their value up. The goal is to sell the securities at a profit once rates have climbed substantially. But numerous historical examples show that cornering does not always work out as planned.
Cornering securities may be seen as market manipulation. As such, it is forbidden at some stock exchanges. Stock market offenses and abuses are defined by Swiss stock market laws which, in regard to insider trading and market manipulation, were updated on May 1, 2013. Potential offenses may be identified by the financial supervisory authority FINMA.
The term “corner” is often used in relation to futures. A market cornering can create a domino effect in which short-sellers are forced to buy the cornered stocks to cut their losses. This in turn drives the stock price even further upwards.
Take a look at this example: Stock market investors speculate on a slump in the prices of certain securities, and initiate a large amount of short sale positions for those securities. Other investors catch onto this and corner those securities by buying them in large numbers, creating an artificial shortage, with the objective of working against the interests of the short sellers.
The scarcity of the securities creates a disproportionately high demand for those securities on the market. This forces short sellers to buy the stocks they have shorted at any ask price to close their positions and avoid making even bigger losses. In stock market jargon, these short-selling investors have been the victims of a “short squeeze”.
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