What is cornering?
Cornering is when someone tries to buy a whole lot of something, like a stock or a product, to control the price. It’s usually not a good thing. Most of the time, it doesn’t work, but it can mess things up if it does, especially if there isn’t a lot of that thing to begin with.
Imagine if your friend bought every single cookie at the bake sale so she could charge $10 each to the other kids who wanted one. Not cool, right? Well, that’s kind of like cornering, but with way more significant amounts of money.
How cornering works
The basic idea is pretty simple. Let’s say there’s this thing called Gizmo stock. There aren’t a ton of Gizmo shares out there to buy. If one person, or a group, starts scooping up as much Gizmo stock as they can, there’s gonna be less and less of it available.
As Gizmo shares get harder to find, the price goes up. Supply and demand. The person doing the cornering can then sell their shares at a higher price and make a big profit. They might also try to get other investors to buy Gizmo at the inflated price.
The tricky part is, you need a lot of cash to buy that much stock in the first place. And if people realize what you’re up to, the whole plan can fall apart real quick. The price might crash before you can sell. Oops, there goes all that money!
Is cornering legal?
Nope, not in most places. There are laws against this kind of price manipulation. It’s seen as unfair to other investors who aren’t in on the scheme.
But some people still try it, especially with investments that are “thinly traded,” meaning there aren’t many shares or there’s not a lot of buying and selling going on. Those are easier to corner than stuff that’s traded a lot, like big company stocks.
Famous cornering attempts
There have been some wild attempts to corner markets over the years. Let’s talk about a couple of the big ones.
The Hunt brothers and silver
Back in the 1970s, these two rich brothers, Nelson and William Hunt, tried to corner the silver market. They started buying up tons of silver, even borrowing money to get more. At one point they controlled around a third of all the silver in the world that wasn’t owned by governments!
The price of silver shot way up, from about $6 an ounce to over $50. But then it all came crashing down in 1980. The brothers couldn’t repay the money they borrowed and went bankrupt. It was a huge mess.
The onion king
Onions, yep you read that right. In the 1950s, this guy named Vincent Kosuga bought a massive number of onion futures. Those are contracts to buy onions at a set price on a future date. He was trying to create an onion shortage.
Kosuga also got farmers to let him store their onions, promising good prices later. But then he started dumping his stockpile, lowering prices. The farmers’ onions were now worth way less. Kosuga’s plan failed and he got into legal trouble. After that, onion futures got banned.
Do cornering attempts usually work?
No, most of the time they don’t. It’s super risky and really hard to pull off, especially in today’s markets with all the regulations.
You need a huge amount of money to even try it. We’re talking hundreds of millions or billions of dollars for bigger markets. That’s a lot of cash to gamble with.
Plus, other investors and regulators are always watching for this stuff now. If people catch on to what you’re doing, they can take action to stop it. They might sell a lot of the thing you’re trying to corner, or spread the word so nobody buys at your inflated prices.
Heck, sometimes just the rumor that someone is trying to corner a market is enough to make the price crash. Suddenly you’re the one left holding the bag!
So yeah, cornering is a great way to lose a ton of money real fast. It hardly ever works out the way the person planned. Most investors aren’t dumb enough to even try it these days.
What happens if a corner succeeds?
Okay, but what if by some miracle a cornering attempt actually worked? Well, it would probably be bad news for most people involved with that market.
If you managed to buy up a huge chunk of something and drive the price way up, you could force other investors to pay through the nose for it. There would be a lot of stress and chaos until the price eventually crashed back down to normal.
In the meantime, everyday folks might have to deal with shortages or crazy high prices for stuff related to the cornered market. Like, if you cornered the market for a certain metal, that could jack up the cost of electronics or cars or whatever that uses it.
Not to mention all the legal trouble you’d probably land in. The authorities really don’t like market manipulation. You could face big fines or even jail time in a lot of cases.
So even if you “succeeded”, you might regret it pretty quick. It’s kind of a Pyrrhic victory, where you win but you still lose, just in a different way.
