Definition
“Cornering the Market” is a financial strategy where an investor or firm acquires a significant enough portion of a particular commodity, security, or entire market sector to gain control over its price. Essentially, the investor or firm becomes the dominant market player. This can lead to potential manipulation, where the entity can drive prices up or down at their discretion.
Key Takeaways
- Cornering the Market refers to the act of gaining significant control or ownership over a particular commodity or asset with the intention to manipulate its price. This typically involves buying a large volume of the asset to create a shortage and increase demand.
- This practice, while it can yield significant profits for the perpetrator, is generally considered unethical and is illegal in most jurisdictions. It hampers the free functioning of markets by artificially inflating prices and creating artificial shortages.
- Historically, most attempts to corner the market have ended in financial disaster for those who tried it. The inherent volatility and unpredictable nature of the market, along with regulatory actions, usually bring these schemes down.
Importance
Cornering the market is an important finance term because it refers to the act of a single entity acquiring enough control or ownership over a particular commodity, stock, or other asset to manipulate its price.
This could allow the entity to make substantial profits at the expense of other market participants.
However, this strategy is both high risk and subject to regulatory oversight due to its potential to disrupt normal market dynamics, as it could foster monopolistic conditions and discourage healthy competition.
Understanding this term is critical for traders, regulators, and investors to identify situations where market manipulation could occur, which could impact wealth distribution, market confidence, and overall economy efficiency.
Explanation
Cornering the market is a strategy applied with the main purpose of acquiring enough control of a particular product, service, or commodity in the market to be able to manipulate its price. It can be implemented by several individuals or a single entity that has strong purchasing power.
The objective is to lock down such a massive proportion of a given market sector that the entity can control the supply-flow of the commodity; thus, having a predominant say in determining its price. This strategy is often taken on by large and highly influential market participants, such as massive trading firms or wealthy investors, for the purpose of gaining substantial profits.
Once they manage to possess a large percentage of the supply, and other traders have developed a strong demand for the commodity, these entities can sell off their inventory at elevated prices. Nonetheless, the practice is considered unethical and is generally illegal in many jurisdictions due to its potential to pose significant market inefficiencies and drawbacks to average investors.
Examples of Cornering the Market
The Hunt Brothers and the Silver Market: One of the most famous examples of cornering the market occurred in the late 1970s when the Hunt Brothers from Texas attempted to corner the silver market. They started purchasing silver and silver futures contracts in large quantities, this drove the silver price from about $6 per ounce to a peak of nearly $50 per ounce in
However, once regulatory bodies imposed higher margin requirements on silver contracts, the process reversed and the market collapsed, causing significant financial loss for the Hunt Brothers.
Porsche and Volkswagen Shares: In 2008, Porsche made a notorious attempt to corner the market. They slowly accumulated a lot of Volkswagen shares, for what they claimed was protection against hostile takeovers. By the end of October 2008, Porsche held over 74% of Volkswagen’s common stock, leaving a very small percentage accessible to the public. As a result, Volkswagen briefly became the world’s largest company by market capitalization. However, the situation quickly reversed when Porsche’s potential liabilities came to public light.
De Beers and the Diamond Market: For most of the 20th century, De Beers, a multinational mining corporation, maintained a dominant position in the global diamond market. Through its central selling organization called the Diamond Trading Company, De Beers consolidated various diamond mines, effectively controlling the supply of diamonds onto the market. By doing so, they were able to keep diamond prices high. However, in recent decades, more competitors have emerged, breaking the De Beers monopoly and reducing their market share.
FAQs on Cornering the Market
What does “cornering the market” mean?
Cornering the market refers to obtaining sufficient control of a particular stock, commodity, or other asset to allow the holder to manipulate the market price. This is often an illegal activity when it creates artificial, non-competitive market conditions.
Who is known for cornering the market?
Throughout history, a number of individuals and groups have attempted to corner the market. However, one of the most notable was the attempt by the Hunt Brothers to corner the silver market in the late 1970s and early 1980s. Their actions led to a rapid increase, and then subsequent crash, in the price of silver.
What is the impact of cornering the market?
When an entity successfully corners a market, it can artificially inflate prices and create a price monopoly. This severely limits consumer choice and competition, and can potentially destabilize the entire market system. Often times leading to accusation and legal penalties to the offender.
Is cornering the market legal?
While it’s technically possible to corner a market legally by simply buying up as much of a commodity as possible, in practice, most strategies that aim to corner the market involve some degree of market manipulation, which is illegal. It’s also generally considered unethical and contrary to the principles of open and fair trading.
Can the stock market be cornered?
While technically it could be possible to corner a small, illiquid market, in the modern era it is near impossible to corner a large market such as the stock market due to its sheer size, numerous participants and strict regulations. Therefore, it is highly unlikely that individuals or groups could gain sufficient control to manipulate prices.
Related Entrepreneurship Terms
- Market Manipulation
- Monopoly
- Commodity Trading
- Short Squeeze
- Antitrust Laws
Sources for More Information
Sure, here your four reliable sources for information on the term ‘Cornering the Market’ in finance:
