Cornering the Market can be defined as acquiring the huge number of shares of a specific security type of a firm in a niche market. It also means holding significant levels of the commodity to be in a particular position to manipulate its price in the market.
In a nutshell, Cornering the Market means that the market has been backed into the corner and there is hardly or no chance for the market to find buyers and sellers.
Meaning of Cornering the Market Or Cornering in Investing
To be able to apply and follow the strategy of Cornering the Market, an investor needs to have really deep pockets and strong financial capabilities as it requires acquiring the majority of physical assets. It also means accumulating the major portion of the economic activity of the said market area.
For instance, the smartphone company is said to have successfully applied the business strategy of Cornering the Market if it dominates 90% of the wireless companies in the operational market.
The large corporate firms and companies have the advantage of Cornering the Market through legal methodologies as they have sufficient financial capabilities and a major influence in the market.
The company that is successful in applying the strategy of Cornering the Market has a competitive edge and advantage over its contemporaries in the market.
Competitors can file a complaint against the firm to the ruling authority for the scrutiny of the company that has a large market share.
Even the technological giant such as Microsoft had to go under the radar of scrutiny owing to its huge share of computer operating systems in the market.
In the case of firms trying to Cornering the Market owning the huge market in shares, commodities, bonds, foreign exchange, and other such securities; the regulatory bodies regulate and monitor the same in order to prevent the issues such as illegal trading of the stocks and commodities.
Is Cornering a Market Illegal?
- Majority of the times, the concept of Cornering the Market is related to the illegal activities in the market.
- One of the major reasons behind the same is that the marketers have an intention to encourage the levels of competition in the market that will result in the competitive price discovery.
- If any of the company is Cornering the Market by combating and limiting the number of buyers and sellers in the market that are willing to indulge in the purchase requires the intervention by the regulatory authorities in order to restore the regular market practices.
- One of the illegal ways of Cornering the Market is through hoarding huge amounts of physical assets in the market.
- There were been various unsuccessful attempts to Cornering the Market of the copper in the era of 1990s.
- In the years of 1970s and 1980s, the famous Hunt Brothers tried to corner the silver market through the way of hoarding.
- Nearly after the 10 years of various attempts, they finally failed as they were not able to borrow more funds to buy silver on a continuous basis.
- And it resulted in the crash of prices of silver and there were no buyers of silver apart from the brothers.
Why does it matter?
- The strategy of Cornering the Market is illegal in nature as it results in an unfair competitive advantage in the market. And the various regulatory bodies of the various nations have a close watch and study over the same if there is an accumulation of the particular securities in the market.
- However, the other players in the market also have a role to correct the behavior of Cornering the Market.
- Though the corner has the power of financial stability to influence the prices this position also makes him fragile and vulnerable in nature as the market is now aware of his ulterior motives and real identity.
- The other players in the market will take note of the inefficiency and initiate the opposing positions that will help to reduce the value of the holdings of the firm that is trying to Cornering the Market.
- Hence, it will make very difficult for the corner to exit his position without his further contribution to the falling prices of the said stock or the holding.
- In many markets, the investors have no need to control the major portion of the particular investment or the holding and getting termed for Cornering the Market.
- For many years, quite many companies and individuals have tried to corner the markets such as oil, silver, natural gas, and others.
How does Cornering the Market work?
- One of the most direct ways to Corner the Market is to hoard and buy the majority percentage of a particular commodity or stock in the market.
- In the market of futures trading, Cornering the Market is simpler than any other market. The corner purchases the large amounts of futures trading contracts that result in the price inflation and further looking to sell the same at huge profits.
- Many of the major corporate companies look to corner their respective operational markets with an intention to gain huge profits their firms.
- With the strategy of market cornering, they are able to obtain the required supply of the specific commodity and they are able to charge the price they want without any fear of losing out the substantial business.
Disadvantages of Cornering the Market
- With the huge prevalence of the strategy of Cornering the Market in the market of commodities trading, it is quite a difficult task as the corners come under the pressure of their own size of the business.
- It is quite a huge position to hold and sustain in the market. And many of the firms fail in their attempt as they lack the infrastructure facilities.
- With this, there is an added competitive pressure on the firms to sustain and stay relevant in the market.
- Many of times government also step into combat and prevent the process of Cornering the Market.
How to act against Cornering?
Usually, the market solves the issue of Cornering the Market naturally.
The corners set the price fixed for the commodity or the stock that they wish to corner. And when the individual or the company becomes known to the other players in the market and public as a whole, the entity becomes quite vulnerable.
There is an opposition from the other players and it helps to reduce the value of shares or stocks that are owned by the corner. And it makes difficult for the corner to exit a hi position without slashing down the prices.
Conclusion
The strategy of Cornering the Market is illegal and it is unfair for the other players of the market and economy as a whole.