Liquidity Information & Infrequently Traded Stocks
When a stock is liquid, there are many buyers and sellers at the market price, and this keeps prices relatively stable. When a stock is illiquid, you may find it difficult to buy and sell the stock at the market price because the act of buying and selling actually changes the price. At the same time, illiquid stocks can be attractive to individual buy-and-hold investors who rely on fundamental analysis, or professionals who profit from volatility.
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How to Tell If a Stock is Illiquid
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The easiest way to tell if a stock is illiquid is by looking at its trading volume and "bid-ask spread." These figures are available from websites such as Yahoo Finance (see link below). Liquid stocks generally have trading volume in dollar amounts higher than $25 million. This is calculated by multiplying the market price by the daily volume. In addition, the "ask" price should be close to the the selling price of the stock for the stock to be considered liquid.
Professional investors also look at the "market depth," which tells them how much the price moved during the last few transactions. If the price moved a lot, the stock could be illiquid. This data is not available to many casual investors.
Volatility
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Illiquid stocks also experience high volatility, which means that their stock price can change rapidly from one day to the next. This can make these stocks too unpredictable for casual investors looking for safe and steady returns. Investors who prefer illiquid stocks don't mind waiting a long time for the price to rise, and don't panic if the stock sinks suddenly.
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Small Investors Can Profit From Illiquid Stocks
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Large investors such as mutual funds like to buy liquid stocks because they are easier to sell at a fair price in large volumes. Smaller, illiquid, stocks may be a good bargain for individual investors if they research the company carefully by studying their financial documents. The small investor hopes to purchase the stock when it is illiquid, and then sell it at a higher price when larger investors become interested.
Selling Illiquid Stocks
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If you own an illiquid stock, selling the stock can be tricky because the price may decrease as you are selling your shares. Therefore, you should avoid selling at the market price and instead use "limit" orders, which allow you to indicate the lowest price at which you are willing to sell the stock. If there are not enough buyers at that price, you can sell the remaining shares another day when there may be more buyers.
Professional Investors
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Some professional traders use "gap strategies" that take advantage of big price swings between two consecutive trading days. The basic idea is to buy right after a sharp drop in price, and sell right after a big increase in price. This event occurs more frequently with illiquid stocks.
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