How does 'scalping' negatively impact investors?

How does 'scalping' negatively impact investors?

• A. By encouraging long-term investments
• B. By falsely promoting stocks for personal profit
• C. By diversifying portfolios aggressively
• D. By reducing trading volume in the market

Answer: (B)

Scalping negatively impacts investors primarily by falsely promoting stocks for personal profit. In scalping, a trader buys shares of a stock and then sells them quickly, often within minutes, to capture small price changes. This practice can create artificial demand for a stock, misleading other investors into believing there is genuine interest or value in the stock. As scalpers push prices up artificially, inexperienced or uninformed investors may be encouraged to buy in at inflated prices, resulting in financial loss when the scalpers sell off their positions, causing the stock price to plummet.

The other options do not accurately describe the ramifications of scalping. For instance, encouraging long-term investments contradicts the very nature of scalping, which is more focused on quick profits rather than building a sustainable investment strategy. Similarly, aggressively diversifying portfolios would actually imply a strategy to mitigate risk, which is the opposite of the high-risk nature of scalping. Finally, rather than reducing trading volume, scalping often increases the frequency of trading in targeted stocks, adding to the market's activity in the short term. However, this increase is not based on genuine value but rather on speculative moves, which ultimately harms the integrity of the market.