What is a Daisy Chain?
In finance, a daisy chain is an investment scam whereby a group of fraudulent investors inflate the price of a security and then sell it at a profit.
How Does a Daisy Chain Work?
In a daisy chain scenario, an investor or group of investors holding a long position in a low-price, small-cap stock unfoundedly publicize the stock as a promising opportunity. Susceptible, credulous investors subsequently purchase shares, which, collectively, leads to a rise in the stock's price because of heightened demand.
Once the original perpetrators have decided that the price of the stock has peaked, they sell off the entirety of their positions for a profit. Subsequently, the false advertising campaign ends and the stock price returns to its original level.
Why Does a Daisy Chain Matter?
Daisy chain scams are an illegal practice punishable by heavy fines by the Securities and Exchange Commission (SEC). With the advent of easily accessible and effective advertising via the Internet, the scams have become more common in recent years. Though investment advice such as stock tips can be convenient, investors are strongly advised to perform their own research on recommended stocks in order to avoid get-rich-quick scams.
