Opportunities in Thinly Traded Shares
“Thinly traded shares” are shares of companies that trade a low volume of shares per day. In extreme cases the share may trade only a few times per month and the daily average could be in the range of 100 shares and the average daily value of the trade could be in the range of one thousand dollars or less. Of course there is a continuum of what is considered thinly traded. Any share which does not have an average daily trade value of at least $10,000 would be considered thinly traded by most investors. Meanwhile a large institutional trader might consider any stock that is not trading one million dollars in value on an average day to be thinly traded.
While some investors would like to be famous for their trading prowess, after the fact – no investor wants to attract notice when they are actually trading. When you buy a stock you want your order to be small in relation to the daily average traded amount, so that your trade does not drive up the market price. Once you own shares in a company it is always preferable to be able to sell those shares at the recent market price without driving down the price.
If a retail investor wants to invest $5000 in a company this will not be a problem if the company is trading say $100,000 in value per day. But it could be a problem if the company only trades an average $2000 per day. In that case the existence of the retailers order to buy could be enough to drive up the price of the shares.
Thinly traded shares present an opportunity for the astute retail investor who is willing to be patient in both buying and selling and who is willing to put up with price volatility.
While there is an opportunity there are also reasons to be cautious with thinly traded shares as explained in our related article.
I think an opportunity exists for retail investors because there is and can be essentially no analyst coverage on very thinly traded shares.
Institutional investors would likely ignore anything that is not trading perhaps $100,000 per day or more (usually much more) because it would be too thinly traded for the purposes of large institutional investors. But such a stock might not be too thin for a given individual small retail investor. Meanwhile analysts cannot cover the stock because if a number of their clients tried to buy, that would drive up the price. No legitimate analyst would want to recommend a thinly traded stock and then see it rise in price only because his or her own clients bought the stock. In that case there would be no one to sell to and the stock might quickly collapse.
In the past I have had a smaller following of investors who were looking at my stock picks. As I now have more subscribers I have recently removed a few thinly traded stocks from my list because I did not want to get into a situation where my analysis might drive the price up. I can still certainly cover stocks that are somewhat thinly traded by institutional standards, but I will not be covering extremely thinly traded shares.
The bottom line is that it seems very likely that bargains could exist from time to time among thinly traded shares. Therefore such shares would be a good place for an individual retail investor to hunt for a bargain if he or she has the ability to do their own analysis of the earnings and the value of the company.
Shawn Allen
InvestorsFriend Inc.