In stock market jargon, scalping can mean either of two things.
Firstly, it refers to a legal form of day trading, particularly in CFD and forex trading. In this form of scalping, traders apply major amounts of leveraged capital to small fluctuations in market rates.
Secondly, scalping also refers to specific insider trading practices which constitute illegal behavior by market participants. In this form of scalping, positive reports are used to artificially drive the price of a purchased security up. After successfully driving up rates, inside traders then sell the assets at a profit.
“Scalpers” primarily buy up securities issued by smaller companies which do not have a high market capitalization, because prices of these securities are easier to influence and manipulate.
Penny stocks – stocks which have very little stock market value – are the preferred targets of scalping manipulators. After being purchased by scalpers, these penny stocks are deliberately promoted to create a market demand, which drives their value up.
Rates normally drop radically following the hype, because they have been heavily overvalued. Small investors and traders are the usual victims of scalping. When rates fall, investors which bought into the hype are “scalped”, meaning they lose most of their investment.
The instigators of this type of price manipulation are typically people or entities who are considered authorities in investment circles and therefore wield considerable influence. These may include stock market authors, journalists, newsletter authors, news publishers, financial analysts, experts and “gurus”.
Scalping attempts are considered a punishable offense in Germany and Switzerland. However, it isn’t always easy to distinguish scalping from legal stock market activity, and a scalping can be very difficult to prove.
Besides being able to show evidence that trade volumes worthy of a scalping were transacted, investigators also need to prove that the instigator acted deliberately.