Thinly Traded

What Is Thinly Traded?

Thinly traded securities are those that won't be quickly sold or exchanged for cash without a tremendous change in price. Thinly traded securities are exchanged in low volumes and frequently have limited numbers of intrigued buyers and sellers, which can lead to volatile changes in price when a transaction happens. These securities are otherwise called being illiquid.

Seeing Thinly Traded

Most thinly traded securities exist outside of national stock exchanges. For instance, numerous public companies listed on over-the-counter (OTC) exchanges are thinly traded since moderately low dollar volumes are traded every day. The lack of ready buyers and sellers normally leads to large differences between the ask price and bid price.

At the point when a seller sells at a low bid or a buyer buys at a high ask, the price of the security can experience a critical move. Thinly traded securities are generally riskier than liquid assets on the grounds that a small number of market participants can impact the price, which is known as liquidity risk.

There are two methods for deciding whether a security is thinly traded:

Dollar volume: This measurement lets investors know the number of U.S. dollars are being traded on a given day. Securities with low dollar volume might be viewed as thinly traded compared to those with higher dollar volumes.
Bid-ask spread: The difference between the bid and ask price is typically indicative of a market's liquidity. Thinly traded securities have a more extensive bid-ask spread than liquid securities.

Risks of Thinly Traded Investments

Thinly traded stocks aren't intrinsically terrible investments, yet they imply a greater level of risk than liquid investments. For instance, numerous value investors that search for depressed opportunities might run over thinly traded stocks trading at a discount, however selling a position that doesn't work out can be very difficult at a decent price.

Investors claiming thinly traded securities might be forced to assume a loss in the event that they need to rapidly sell. That is, they may not get the best price thinking about there's not a consistent supply of buyers. Now and again, it may not be imaginable to sell the security by any means. Overall, the price of thinly traded stocks will in general be more unstable.

Too, numerous institutional traders and investors keep away from thinly traded stocks since it's hard to buy or sell stock without alarming other market participants that something is going on. Guideline wise, numerous institutions can't invest in thinly traded stocks on the grounds that their buying activity would substantially move the stock price. The fundamental exception is thinly traded American depositary receipts (ADRs) that might be involved by institutional traders for arbitrage purposes.

The following chart shows an illustration of a thinly traded stock:

The volume in the chart shows up as the bars overlapping the price. As may be obvious, the stock is traded over the counter and experiences emotional price developments over time.

While there are a huge number of shares traded on certain days, it's important to note that the stock trades at just over a penny, and that means the dollar value of these trades is moderately small compared to larger blue-chip companies that trade a great many shares every day. On account of a thinly traded stock, the price can be effortlessly controlled, which can put investors at risk.

Highlights

Thinly traded investments represent a greater level of risk compared to liquid investments.
Thinly traded not entirely settled by low volume or wide bid-ask spreads.
Thinly traded alludes to securities that trade with low volume, showing increased volatility.
Many thinly traded public companies trade on over-the-counter exchanges.