MERITS OF TRADING STOCKS WITH LOW VOLUME
Trading stocks with low volume can be perilous or rewarding.
Normally, low-volume stocks have a daily average trading volume of 1,000 shares. These stocks belong to small, unrecognized companies trading on over-the-counter (OTC) or major stock exchanges. Mainstream investors and traders have little or no interest on these stocks. Having said that, unknown stocks are prone to price manipulation and low liquidity, not to mention smaller and new firms are not well represented.
Thinking of venturing into low-volume stocks? First and foremost, determine whether you are after short-term gains or investing in a not-so-popular company in the long run. If you are a short-term trader, you can swiftly generate profits from irregular price movements of these shares. It does not take much to substantially change the stock price since very few shares are being traded. Conversely, you cannot purchase or sell the stock for maximum profit due to lack of liquidity. For long-term investors, master the art of evaluating a corporation’s business prospects. Due your own diligence and study the entity before investing. Several small-time corporations often trade on OTC exchanges to raise capital. But very few succeed in the long stretch.
There are other factors to take into account when trading low-volume stocks:
- Individual Profile - You may want to assume the market maker role if there are few or no firms. A market maker chooses one or two stocks, and offers buying or selling on these by providing bid and ask price. To retain liquidity, the individual or firm facilitates both buying and selling. At this rate, the trader can optimize low liquidity by giving huge bid-ask spreads to their counterparts and take home the difference. However, this strategy won’t work unless you have a backup plan.
- Corporate actions - Certain shares may trade at low volumes because its very high stock price. Corporate actions, such as stock split, can result to lower prices and greater trading volumes. Although predicting when corporate actions will take place remains a challenge, the result is higher liquidity and market participation.
- Multibagger potential - If you study and research about the industry thoroughly, there is a huge chance to score long-term windfall gains in low-volume stocks. Investors, if they have understood the industry and companies well, can multiply their investments many times, making them bag hefty profits.
- Overall market increase - Market rise in general may be the outcome of a progressing government, easing oil prices, and other developments within and outside a country. On that note, low-volume stocks frequently benefit the most.
- Macroeconomic factors - Low-volume stock trading can also be the result of local or global macroeconomic factors, including inflation, high interest rates, economic slowdown, or recession. But seasoned investors can utilize extra capital to invest in winning stocks that will give high returns in the long stretch.
- Temporary events and stages - Political upheaval, war, extreme weather, or other uncertainties encompassing key events may be the best time to take advantage of low-volume stocks. With right assessment and strategy, investors can amplify the prices of their stocks up to 15-folds in the future.
- Exchange-driven changes - Such initiatives tend to escalate the returns from thinly traded stocks, which can provide considerable profit opportunities to risk-favoring traders. Bats Global Market Inc. wrote a proposal about focusing on low-volume stocks on fewer exchanges, which can possibly boost their liquidity.