What is a 'Daisy Chain'

Daisy chain is a term used to describe a group of unscrupulous investors who, when practicing a kind of fictitious trading or wash selling, artificially inflate the price of a security they own so it can be sold at a profit. Small-cap stocks with low liquidity are highly susceptible to daisy chains because price manipulation is typically harder for stocks with high trading volumes.

BREAKING DOWN 'Daisy Chain'

Daisy chain is a financial scam conducted by a group of investors in the public equities market. These investors team up to increase the value of an equity security, and then flip their ownership of that equity to unsuspecting investors who are chasing an upward trend.

Investors who do not look carefully at a stock are usually the prey of a daisy chain. As a stock rises due to increased volume, investors who do not do their homework may be attracted to the stock because they want to participate in the rising price. These investors are typically caught owning a stock that continues to depreciate long after the daisy chain sells out their positions for a profit. In fact, sometimes these unsuspecting investors increase their positions as the stock prices fall, thinking they are buying a dip, only to find the stock will never again reach its unnatural peak.

How a Daisy Chain Scam Works

A group of investors team up to create a daisy chain by purchasing long positions in a low-priced and thinly traded small-cap stock. The group of investors, who normally have significant influence on the public markets, publicly disseminate faulty information that leads other investors to believe the stock is a good investment. Investors take the information presented and use it in an investment decision to purchase shares of the small-cap stock. This increases its trading volume and demand above normal levels and increases its price.

The group of investors associated with the daisy chain then waits until the small-cap stock reaches peak levels and sells its long position. The investors realize a profit on the sale and then subsequently stop the false marketing campaign so the stock returns to normal levels of volume and value.

For example, Broker I will buy a stock at $50 and sell it for $60 to Broker II, who is also part of the daisy chain. The second broker than sells the stock for $70 to another broker who’s in the chain. Broker I will then buy the stock back at the end of the day for $60. Someone who isn’t part of the chain will see that the stock sold for $60 during the day, and, thinking it’s a good investment because of the $10 price increase, will jump in to purchase the stock. 

Punishments for Conducting a Daisy Chain

Daisy chains have become more prevalent in recent years due to the rise of marketing on the internet. The Securities and Exchange Commission (SEC) is therefore tasked with the increased enforcement of punishment for any daisy chains. All daisy chain scams are considered an illegal practice in the public markets, and anyone found guilty of participation can face heavy fines and penalties.

RELATED TERMS
  1. Supply Chain Attack

    A supply chain attack is a cyberattack that attempts to inflict ...
  2. Option Chain

    An option chain is a listing of all puts, calls, and strike prices ...
  3. Supply Chain Management - SCM

    Supply chain management is the streamlining of a business' supply-side ...
  4. Replacement Chain Method

    The replacement chain method is a decision model for evaluating ...
  5. Chained Payment

    Chained Payment is a parallel method of payment that involves ...
  6. Business Broker

    A business broker is a company that assists in the purchase and ...
Related Articles
  1. Personal Finance

    Why You Should Consider A Career In Supply Chain Management

    Supply chain managers ensure that increasingly global companies can coordinate distant sources of materials, labor, and manufacturing to successfully bring products to market.
  2. Small Business

    Value chain analysis: The basics

    Value chain analysis establishes an action plan to understand and implement activities that create values to a firm's clients, resulting in firm profits.
  3. Investing

    Dollar General to Add a New Distribution Center

    Dollar General (NYSE: DG) has been one of the major success stories during a challenging period for many retailers. While a significant number of other chains are getting smaller or closing up ...
  4. Investing

    Dollar General Buying Dollar Express Chain

    At a time when many retailers have been closing stores, Dollar General (NYSE: DG) has been adding them at a furious pace. The discount chain plans to open 1,000 new locations in 2017, after ...
  5. Investing

    Dollar General Finishes Its Fiscal Year Strong

    Deep-discount chains have generally been resistant, if not immune, to the so-called retail apocalypse that has been hurting so many brick-and-mortar chains. Dollar General (NYSE: DG) is a prime ...
  6. Investing

    IJS: iShares S&P Small-Cap 600 Value ETF

    Learn how the iShares S&P Small-Cap 600 Value exchange-traded fund is managed, which benchmark it tracks and for whom it is most appropriate.
  7. Investing

    Target Makes a Final Push for Holiday Shoppers

    The holiday shopping season appears on track to be successful for retailers overall, but the battle between individual chains and e-commerce sites has been intense. That competition got the most ...
  8. Investing

    How to Ride the Small-Cap Rally (IWM,SCHA)

    Small-caps are on a bullish tear. Here's how to play the rally.
  9. Investing

    Dunkin' Donuts Reports Q4, Full-Year Gains

    Dunkin' Brands (NASDAQ: DNKN) struggled at times in 2017, but it finished the year with some positive results. The chain saw comparable-store sales rise by 0.8% at its namesake brand in Q4, while ...
  10. Investing

    Here's How Denny's Is Turning Its Business Around

    For years, restaurant chain Denny's has been a bit hard to classify. The company, which calls itself "America's Diner," tends to offer better value than most sit-down chains, but it's more expensive ...
RELATED FAQS
  1. What is a "daisy chain"?

    A daisy chain is a term used to describe a group of investors who engage in activities that inflate or deflate the price ... Read Answer >>
  2. What is the difference between a value chain and a supply chain?

    Learn the difference between a value chain and a supply chain, and why a company would want to maximize the value of both. Read Answer >>
  3. What are the primary activities of Michael Porter's value chain?

    Understand the primary activities of Michael Porter's value chain, and learn how a company can optimize those activities ... Read Answer >>
  4. How do the risks of large cap stocks differ from the risks of small cap stocks?

    Understand the important differences between large- and small-cap companies that make small-cap firms a more risky equity ... Read Answer >>
  5. How does a pump and dump scam work?

    A pump and dump scam is the illegal act of an investor or group of investors promoting a stock they hold and selling once ... Read Answer >>
Hot Definitions
  1. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  2. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  3. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  4. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  5. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  6. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
Trading Center