The Advantages of Thinly Traded Stocks
Thinly traded stocks tend to go unnoticed by most investors because they are not as popular as other stocks. A stock that trades less than $10,000 worth of stock per day may be considered thinly traded by most investors, and large institutional investors may not look at a stock that trades less than $1 million worth of stock per day. Investing in thinly traded stocks can provide investors with opportunities more active stocks don’t offer.
Potential Short-Term Appreciation
If a thinly traded stock suddenly catches the attention of investors, even a small increase in demand can trigger large increases in share price. For example, if a stock normally trades only 2,000 shares per day and a favorable article comes out in a financial journal, demand could soar to more than 10,000 shares per day. This sudden demand could drive the price much higher over a period of days or weeks, resulting in large profits for those who held the stock before it became popular.
Bargain Prices During Dips
If someone sells a large percentage of shares in a thinly traded stock, the price is likely to go down because the supply of shares may exceed the demand from buyers. If you intend to accumulate additional shares of a thinly traded stock, you can watch for dips in the price and snatch up shares at a bargain. The same volatility that brought the stock price down can bring it back up, and you can profit from buying when shares are cheaper.
Selling the Stock Through the Company
If you want to sell and you find no buyers, you can call the company and ask them for a “cross.” This means the company will find a buyer for you. Typically, this buyer will offer a competitive price. The company is willing to do this to avoid having you engage in desperation selling, which can drive the price down and greatly reduce the company’s value. Thinly traded stocks tend to be susceptible to desperation selling, so these companies may market your shares discreetly.
Above-Average Long-Term Appreciation
Roger Ibbotson, professor of Finance at Yale School of Management, says thinly traded stocks do better in the long term than active stocks. He adds that thinly traded stocks need very few traders to move the price, and this means that a steadily increasing demand can help these stocks hold onto their gains. More active stocks tend to get sold when they rise in price, while people who buy thinly traded stocks tend to hold them because they find few buyers on any given day. This tendency can put upward pressure on the stock over time.
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.