Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific investment advice, including tips for lower-risk aggressive investing. Each Investor Toolkit update gives you a fundamental piece of investing strategy, and shows you how you can put it into practice right away.
Today’s tip: “What you need to know about ‘thin traders’”
Many speculative stocks, including some of our recommendations in Stock Pickers Digest, our newsletter for aggressive investing, are inactive or “thin” traders. They trade a few hundred to a few thousand shares daily, compared to hundreds of thousands, if not several million, for a Canadian bank.
Thin traders are often more volatile than actively traded stocks, especially in reaction to unforeseen news. These aggressive investing stocks may also have a wider spread between the bid (what you get if you sell “at the market”) and the “asked” (what you pay if you buy). The spread may be 2% to 4% or more, compared to 1% or less for an active trader.
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This is more of a cost than a risk. Every time you buy and sell, you have to absorb the bid/ask spread as a transaction cost, on top of brokerage commissions. If you trade actively, this adds up.
It’s less of a problem if you hold for a year or two, or longer, as we generally advise.
Aggressive investing stocks are often thin traders because they have few shares in public hands, or because brokers don’t do research on them. But, as they grow and prosper, they may sell more shares and attract broker attention. If so, trading expands, the spread shrinks — and the stock price goes up.
That’s one more reason why our Stock Pickers Digest aggressive investing recommendations have more profit potential than established stocks, albeit at a cost of extra risk.
Next Wednesday, May 18, 2011, Investor Toolkit will show you some common mistakes most investors make—and how to avoid them.
If you buy aggressive stocks, you really should have a subscription to Stock Pickers Digest. The latest issue gives you our full analysis, including clear buy/sell/hold advice, on 19 stocks that may be suitable for the part of your portfolio you devote to aggressive investing. What’s more, you can get this issue free. Click here to learn how.
Comments
charles
You can always put in a ‘limit-order’. Tell your broker to “buy at [something near the ‘bid’ price]” or conversely; “sell at [something near the ‘ask’ price.]
Your order might not get filled right away but you can tell the broker to keep it
“open until filled.”
This way you don’t have to repeat the order each day.
With limit orders, you specify the highest price you are willing to pay to buy. However, you then risk not getting a fill for your order if there is no stock available at or below your price.
This introduces a filtering mechanism that can cost you money. Failing to get a fill is much more likely with your best choices, since they are far more likely to shoot up faster than you guessed. But you’ll always get a fill on your worst choices; they’ll come down to meet your price, then go lower.
In general, most investors should use market orders when buying or selling widely traded shares. The market-order risk of occasionally paying too much is more than offset by the limit-order risk of missing out on your best ideas.
With thin trading shares, you may want to put a limit on the price you are willing to pay if you are buying (or the price you are willing to accept if you are selling). But if you use limit orders, make the limit a fairly wide one. It’s better to pay a little more or receive a little less than to miss out entirely on your best investing ideas.
Learn everything you need to know in
'How to Find the Best Growth Stocks'FREE Special Report from The Successful Investor.
Canadian Growth Stocks:
CGI Group, CAE Inc., Fortis Inc. Stock and more.
Get Your FREE Report Now:
How to Find the Best Growth Stocks
X No, thanks. I don’t want to make big profits from growth stocks.
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You can always put in a ‘limit-order’. Tell your broker to “buy at [something near the ‘bid’ price]” or conversely; “sell at [something near the ‘ask’ price.]
Your order might not get filled right away but you can tell the broker to keep it
“open until filled.”
This way you don’t have to repeat the order each day.
Thanks for your comment.
With limit orders, you specify the highest price you are willing to pay to buy. However, you then risk not getting a fill for your order if there is no stock available at or below your price.
This introduces a filtering mechanism that can cost you money. Failing to get a fill is much more likely with your best choices, since they are far more likely to shoot up faster than you guessed. But you’ll always get a fill on your worst choices; they’ll come down to meet your price, then go lower.
In general, most investors should use market orders when buying or selling widely traded shares. The market-order risk of occasionally paying too much is more than offset by the limit-order risk of missing out on your best ideas.
With thin trading shares, you may want to put a limit on the price you are willing to pay if you are buying (or the price you are willing to accept if you are selling). But if you use limit orders, make the limit a fairly wide one. It’s better to pay a little more or receive a little less than to miss out entirely on your best investing ideas.