Trading small batches of stocks can be very risky. The average daily trading volume of low-volume stocks is usually 1,000 shares or less. They may belong to small, little-known companies that conduct over-the-counter (OTC) transactions. But they can also be traded on major stock exchanges.
Such stocks are still outside the reach of mainstream traders and investors and lack general trading interest. They may be risky because their low trading volume leads to lack of liquidity and easy price manipulation. Smaller and newer companies also make up a disproportionate share of small-volume stocks. Such a company can simply go bankrupt, leaving investors with nothing.
But where you find huge risks, there may be huge rewards. In this article, we will discuss possible profitable strategies for trading small batches of stocks.
- Trading small batches of stocks may be risky, but as long as you have the right strategy, you can also get rewards.
- Assume the role of market maker with thin stock trading and consider multi-share trading.
- Pay attention to corporate behavior and macroeconomic factors that affect transaction volume.
- Investors may benefit from the low trading volume caused by temporary events and the overall market rise.
- Changes or actions imposed by the exchange may increase returns.
What is your method?
Before venturing into low-volume stocks, decide on a method. Are you investing in short-term trading gains or long-term investment in a little-known company you believe in? Short-term traders can quickly profit from sporadic price changes in low-volume stocks.
Since very few stocks are usually traded, it doesn’t take much to change the stock price drastically. However, there is always the risk of being unable to buy and sell stocks for maximum profit due to lack of liquidity in the stocks.
Long-term investors in low-volume stocks should be good at assessing the company’s business prospects. Before investing, please carefully study such stocks and understand the company. Experienced traders know that many little-known companies often go public on the over-the-counter stock exchange to raise funds, but in the long run, few have succeeded.
In addition to deciding on a short-term or long-term approach, you may also need to consider other factors when investing in small batches of stocks. We have listed seven below.
Consider taking on the role of market maker in scarcely traded stocks, which have few or no stocks. Remember, the market maker chooses one (or two) stocks and buys and sells them with quotes. Therefore, this person promotes buying and selling to maintain liquidity.
In this role, traders can take advantage of low liquidity by providing a wide range of bid-ask spreads to counterparties and pocketing the spreads. But there must be a backup plan. And take a more limited location instead of accumulating large amounts of inventory that you might not be able to unload.
Microsoft (MSFT) and Infosys (INFY) may be big names today. But at a certain moment, their stocks were not so well-known and the trading volume was very low. Trying to select their young investors through luck or strong stock analysis can double their investment. In other words, they chose what some people in the financial industry call multibaggers.
the term Multi-bag machine Refers to a company whose stock value has increased several times its original value (bag). Therefore, the person who initially invested $1,000 multiplied by $10,000 has $10.
For investors who understand an industry and conduct research, long-term windfall returns are a clear possibility for low-volume stocks.
The benefits of corporate actions
Not all stocks have low trading volumes because of their popularity. In fact, some stocks may be traded this way because their stock prices are very high. For example, Berkshire Hathaway’s Class A stock (BRK-A) is trading at an astonishing price of $214,675 per share. The average trading volume is only 320 shares per day. Seaboard (SEB) is trading at US$3,750 per share, with an average daily trading volume of only 470 shares.
For such stocks, corporate actions such as stock splits may cause prices to fall and trading volume to increase. The result is increased liquidity and higher market participation, and the return may be substantial. The challenge remains to predict when the company’s actions will occur.
Low-volume stock trading may also be the result of local or global macroeconomic factors. A country may be experiencing an economic slowdown or recession, with interest rates and inflation rates rising. During such periods, the overall level of stock trading activity is usually low. Stocks that were lightly traded before the recession performed worse.
If there is enough time, recessions and slowdowns will almost always abate or reverse. Experienced investors can use their excess funds to invest in long-term high-return winners.
Regardless of your trading strategy or goals, be sure to consult a financial professional.
Temporary events and phases
The uncertainty of major events such as political unrest, conflict or extreme weather may be an opportunity to benefit from low inventory. In 2004, India’s general election results were accompanied by a sharp drop in stock prices, when a coalition supported by the Communist Party was the only option to form a government.
Investors who bought stocks at the end of the world found that their low-price purchases had tripled in less than four years. Some of the best-performing stocks are little-known, small-volume stocks with returns as high as 15 times.
Benefit from the overall market rise
As the saying goes, “When the market goes up, everyone makes money.” The overall market rise may be the result of government stability, falling oil prices, and other local or global developments. In the case of an overall increase in the market, low-volume stocks often benefit the most.
Exchange drive changes
The changes or actions imposed by the exchange may increase the return on lightly traded stocks and provide a large number of profit opportunities for investors who prefer risk. For example, Bats Global Market, one of the largest stock exchanges in the United States, proposed a proposal to concentrate low-volume stocks on fewer exchanges. A move like this may increase the liquidity of these small-volume stocks.
Trading small batches of stocks is a risky game. Potential earnings are affected by many factors beyond the control of investors. For investors, the best choice is to take a long-term view-invest in excess funds that you may not need, and choose stocks with good business potential.