Low-volume stock trading can be overly risky. While they may be ideal for small less-known organizations that trade OTC (Over the counter) they can still be traded on substantial stock exchanges.
Often, mainstream investors and traders avoid these types of stocks seeing that their low volume results in less liquidity and makes way for price manipulation. Newer and small organizations are unduly depicted in low-volume stocks.
Such companies can stop existing, leaving investors reeling from losses. Still, low-volume stocks could have various benefits. Read on to understand strategies you can leverage to engage in low-volume trading and earn a profit.
Determine Your Approach?
Before engaging in low-volume stock trading, consider determining your approach. Do you want a short-term arrangement or are you interested in a long-term investment in a less popular but promising organization?
Short-term traders can gain profits from the random price fluctuations of low-volume stocks. Seeing that fewer shares are traded, the stock price is highly likely to change drastically. However, traders always face a risk in that they cannot sell or purchase the stock for maximal profit because the stock lacks liquidity.
Long-term low-volume stock investors should strive to evaluate and understand an organization’s business prospects. Research low-volume stocks extensively and be conversant with the company before investing.
Seasoned traders understand the many less popular organizations listed on over-the-counter stock exchanges regularly to raise capital. However, not many of them succeed in the end. Apart from choosing between a long-term and short-term approach, investors should consider other factors as seen below.
Individual Profile
Embark on the market maker task with lowly traded stocks where there are none or just a few. A market maker chooses one or even two stocks and decides to purchase or dispose of them by quoting ask and bid price. By doing so, they facilitate selling and buying to generate and sustain liquidity.
While executing this task, the trader can leverage low liquidity by providing broad-bid ask spreads to the trading colleagues and retaining the difference. Always have a backup strategy and assume a limited position instead of accumulating a massive inventory whose offloading may prove difficult.
Multibagger Potential
While some company names are huge today, their stocks were not popular some time back. What’s more, the stocks traded are overly low volumes. People who managed to invest in such companies early increased their investments numerous times. They opted to invest in what some people in the financial sector refer to as multibaggers.
A multibagger is an organization whose stock rises value-wise many times over its initial value. An investor whose initial investment was $1,000 and got up to ten times the amount to hit $10,000 is said to have a 10-bagger. Investors who are conversant with the industry, and research extensively are likely to increase their initial investment ten-fold.
Rewards from Corporate Actions
A stock’s low trading volume is not always due to its popularity. Some stocks often trade in such a manner as a result of their overly high stock price. A good example, in this case, would be BRK-A (Berkshire Hathaway’s Class A) stocks which trade at a colossal price of more than $200,000 per share.
The average trading number a mere 320 shares a day. SEB (seaboard) stocks trade at $3,750 each share and the average traded shares per day is 470. With such stocks, a corporate undertaking such as stock separation can lower prices and increase trading volumes.
The result of such an action would be more liquidity and more market participation with substantial returns. However, predicting where corporate moves should occur remains a big challenge.
Macroeconomic Factors
Low-volume trading of stocks can be due to global or local macroeconomic factors. A country could be experiencing a recession or a slowdown with inflation or high-interest rates. During such periods there will be reduced activity in stock trading. Under such circumstances, stocks that were previously lowly traded often perform more dismally. Slowdowns and recessions nearly always reverse or subside with time.
Seasoned investors can bank on surplus capital to invest in promising organizations that will perform well in the long haul. Always consult financial experts regardless of your trading goals and strategy.
Takeaway
Low-volume stock trading is risky and potential benefits are prone to external factors that investors have no control over. An investor can adopt a long-term point of view, invest with the surplus money that they may have at their disposal, and choose stocks with excellent business potential.