Daisy Chain Scams (Explained: All You Need To Know)

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What is a Daisy Chain?

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Let me explain to you what a Daisy Chain is and how it works!

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What Is Daisy Chain

In business, the term daisy chain refers to a financial scam where the scammers will work collaboratively to artificially drive the price of a stock or security up so they can make a profit.

In other words, daisy chain scam artists will get together to purchase a particular stock pushing the stock price upward and leading other investors to invest.

When the stock reaches a certain peak, the scammers will sell their long position for a profit.

Investors who are unsophisticated or do not do proper research before buying a particular stock may see the stock price going up.

Consequently, they purchase the shares hoping that the stock price will continue to rise.

However, since the price of the stock was artificially inflated by the daisy chain artists, the investor ends up paying a price much higher than the stock’s fair market value.

When the market manipulation ends, the stock will go back to its fair value leaving the investors at a significant loss.

Keep reading as I will further break down the meaning of daisy chains in business and tell you how it works.

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How Does A Daisy Chain Scam Work

The main objective of daisy chain scammers is to purchase shares of a particular company, artificially inflate the stock price, and sell for a profit.

The way it works is that a group of investors (daisy chain scammers) work together to execute this scam.

First, the daisy chain scammers will purchase a particular stock at a low price.

Generally, these stocks are either penny stocks or securities traded in over-the-counter markets.

As the scammers purchase a particular stock, they will generate a higher trading volume on the securities and bid in such a way that the stock price goes up.

As this happens, other investors who are not aware of the scam see that the stock price and trading volume is going up. 

This leads market participants to invest hoping to profit from the rising stock price.

Eventually, when the stock price reaches its peak, the daisy chain scammers close out their long position in the stock to cash out their profits.

In the end, investors will end up losing a significant part of their original investment as the stock price will go back down to its fair market value (which is much less than what the investor paid to purchase the stock).

Quite often, the stock will depreciate in price long after the daisy chain operators have completely sold out their position.

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Daisy Chain Scam Characteristics 

Daisy chain con artists make a profit by artificially pushing stock prices upward to sell when the stock hits its highest price point.

The way the stock price is manipulated is through a coordinated effort between the group of investors involved in the daisy chain activity.

Let’s look at the main characteristics of a daisy chain scam to better understand how it works.

The first characteristic is that this investment scam requires a group of investors to work in a coordinated fashion.

For instance, you can have several stock brokers work collaboratively to buy and sell securities in the market to artificially drive the price of a stock up and create higher trade volume.

The second characteristic is that the daisy chain operators will disseminate false and misleading information to the public leading unsophisticated investors to invest.

Generally, scammers have an important influence in the public markets, such as stockbrokers and investment advisers.

Then, the type of securities that are selected for this scam is penny stocks or over-the-counter stocks where you have little market information and thin trading volumes.

To drive the stock price up, Broker 1 will sell the stock at a higher price to Broker 2 who is part of the daisy chain scheme.

Broker 2 will sell to Broker 3 (also part of the scheme) at a higher price.

Then, public investors will want to take advantage of the increase in the stock price and start investing.

At the right time, the daisy chain operators will liquidate their entire stock position to cash out their profits.

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Daisy Chain Consequences

In the United States, the Securities and Exchange Commission actively searches to identify daisy chain scammers and have them punished.

According to the Securities Act of 1933 and Securities Exchange Act of 1934, daisy chain schemes are illegal and considered fraudulent activities.

As a result, any found guilty of running daisy chains will face severe civil and potentially criminal charges.

Generally, civil punishments can include heavy fines, regulatory penalties, the restitution of the profits made, suspension of professional license, or the person being permanently barred from working in the financial sector.

In more serious instances, the SEC can refer a case to the Department of Justice who will review the matter for potential criminal prosecution that could lead to fines and imprisonment.

The reason why daisy chains are illegal is that the operations take advantage of unsophisticated investors by manipulating stock prices.

Any type of market manipulation leading someone or a group of people to profit in public markets is typically considered an illegal activity.

The daisy chain scheme is quite similar to the pump and dump scheme where the operators manipulate market prices to earn a profit.

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Daisy Chain Example

Let’s look at an example of how daisy chains work to better understand the concept.

Let’s assume that three brokers are part of a daisy chain scheme.

Broker 1 purchases a stock worth $4.00 and sells it for $4.25.

Broker 2, who is part of the scheme buys the stock at $4.25 and sells it to Broker 3 for $4.50.

Broker 1 will buy back the stock at the end of the day for $4.25.

As you can see, Brokers 1, 2, and 3 have contributed to pushing the stock price from $4.00 to $4.25 and have created fake trading volume through their transactions.

This goes on for a period of time and the stock reaches a price of $6.00 as market investors have decided to buy shares hoping the stock price will continue to rise.

During this time, the daisy chain operators disseminate false and misleading information to the public leading other investors to buy shares.

Since the daisy chain operators bought the stock originally for $4.00 per share, they can now sell at $6.00 generating a 50% return on their investment.

Once the daisy chain scheme is over, the stock price will drop back down to $4.00 and even below that price point leaving all investors at a significant loss.

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Takeaways 

So there you have it folks!

What does daisy chain mean in business?

In a nutshell, a daisy chain is a type of investment scam where a group of daisy chain operators works together to inflate the price of a security so they can ultimately sell it at a profit.

The way it works is that the fraudulent investors will hold a long position in a low-priced small-cap stock.

Then, they trade the stock between themselves pushing the price up and creating trading volume.

This leads credulous investors to purchase shares thinking the stock price will continue to rise.

When the stock price hits its peak, the fraudulent investors sell all their shares to cash out their profits.

Following the sale of their stock, without the pressure in keeping the stock price artificially inflated, the stock price falls, and all investors who had invested when the price was rising end up losing money.

All investors are cautioned to do their research before they invest in a particular stock and ensure that they are investing with a reputable firm or advisors that they know and trust.

Now that you know what daisy chain means and how it works, good luck with your research!

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