Do you know there is money in underfollowed stocks?

Majority of investors do not pay much attention on stocks that nobody follows. But, picking stocks not followed by most traders have greater potential reward. Not all widely followed stocks have high liquidity and not all underfollowed stocks are really underdogs.

A quick refresher on the efficient market hypothesis: It is an investment theory stating it is impossible to outmatch the market as stock prices show all relevant details. Proponents of the theory argue they are generating profit from allowing the process of making markets efficient. However, some well-known investors have consistently surpassed market averages, including Warren Buffett.

Unless you are Warren Buffett or Ray Dalio, you can never beat the market averages. The market can price stocks better than most traders do. For an average investor to do so, he needs to obtain more information or gain more understanding about a stock. However, the Wall Street and financial institutions allocate billions of dollars each year on research, technology, and workforce to gain advantages.

Investors can at least earn more money by investing in underfollowed stocks. Such stocks are not that efficient due to the lack of coverage and liquidity. Having said that, new details are not immediately reflected in the stock price. Frequently, as an underfollowed stock’s price escalates, it attracts coverage and liquidity, resulting in greater gains and its pricing becoming more efficient.

It is almost impossible for a retail investor to secure an informational advantage on a stock relative to other institutions and the general market. But, one can be knowledgeable about a stock which is not widely followed and make substantial gains using these details as it becomes priced into the stock.

Wall Street and institutions primarily avoid underfollowed stocks because they believe these are not huge enough to invest considerable amounts of money without moving the price. Such stocks with bullish prospects can rise in certain cases, and can become favored stocks in the long run.