Low-volume stocks are those that have a daily average trading volume of 1,000 shares or fewer, but they could hold great potentials.
Although trading in low-volume stocks can be very risky as their low volumes could lead to lack of liquidity and even price manipulation, there are some strategies that can be employed in trading low-volume stocks that could yield profit.
Low-volume stocks are those that have a daily average trading volume of 1,000 shares or fewer. Typically, they may be stocks of new, small or companies who lack proven records trading on over-the-counter (OTC) stock exchanges, and sometimes on main stock exchanges.
Many of these small and new companies have no track record or proven potential and are excessively represented in low-volume stocks as they frequently listed in OTC stock exchanges to raise money. However, there are a few with potential to succeed in the long run.
Here’s how you can too
The first step to investing in low-volume stock is to determine whether it is for short-term trading gains or a long-term investment. This, of course, requires that you carry out fundamental analysis to determine is the company is worth the stress or not.
Sometimes, short-term traders reap profits from the sporadic price movements of low-volume stocks as the prices change drastically due to the low number of trades in these stocks. However, the lack of liquidity of these stocks means that investors stand the risk of not being able to buy or sell the stock for maximum profit.
On the other hand, being skilful in the assessment of companies with high prospect is a critical requirement in getting the mist of long-term investors in low-volume stocks.
It is important for investors to perform due diligence on such companies and their stocks before making an investment. Some other things to consider when venturing into low-volume stocks include:
Profiling
Sometimes, the only way to get things done is to do it yourself. Investors needs to assume the role of both a buyer and a seller and this is done by selecting one or two stocks, and trading them personally.
The investor, therefore, facilitates both buying and selling to maintain liquidity. With this method, the trader can turn low liquidity to an advantage by offering wide bid-ask spreads to the trading counterparts and profiting from the difference.
To make the most of this strategy, an investor must have a backup plan and must always take a more limited position rather than piling up huge inventory that could be hard to offload.
Goldmine Potential
Many successful companies today were once unknown stocks that traded at very low volumes. Investors who managed to pick them young whether through luck, fate or extensive stock analysis, have had their investment multiplied in no small measures.
For investors who understand an industry well and do their research, long-term windfall gains are a distinct possibility in low-volume stocks.
Macroeconomic factors
Low-volume stock trading can also be a result of macroeconomic factors. Market events or events such as a pandemic can trigger an economic slowdown or recession with high interest rates and inflation which is usually characterised by general low stock trading activity.
Stocks that were thinly traded before the recession fare even worse. But recessions and slowdowns almost always abate or reverse given enough time.
Experienced investors can use excess capital to invest in cherry picking winners that will perform with high returns in the long run.
More so, overall market rise may be a result of stable government, easing oil prices, and other local or global developments. In cases of such overall market rise, low-volume stocks often stand to benefit the most.
In conclusion, though trading low-volume stocks is a risky venture, it holds potential benefits. To make the most of these stocks, it is best for an investor to take a long-term perspective by investing in selected stocks with the promise of good business performance and possibly with excess money that they may not need.
Written by Lawretta Egba.
