When you join my Inner Circle service, you get to ask me your own personal investment questions, plus you get to see what other Inner Circle members have asked, along with our answers. So you can see how the service works, and get a sense of how it might help your portfolio, I’d like to share a member question about the liquidity of more aggressive stock market picks. I hope you enjoy and profit from it.

Q: Would you comment on the liquidity of stocks? I fear that if I bought a stock, especially a speculative one, and wanted to sell I wouldn’t be able to. Does the average volume of a stock have any bearing on the stock’s quality, or the ease of being able to sell that stock? I guess what I am asking is if there are any ways to determine the liquidity of a stock.

A: Many speculative stocks, including some of our stock market picks in Stock Pickers Digest, our newsletter focusing on more aggressive investments, are inactive or “thin” traders. They trade perhaps a few thousand shares daily, compared to tens, if not hundreds of thousands for, say, a Canadian bank.

Thin traders may be more volatile than actively traded stock market picks, especially in reaction to unforeseen news. They 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.

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 stock market picks have more profit potential than established stocks, though they do entail some extra risk.

The best answer to your question is that lack of liquidity can make it hard to sell any stock in a hurry without accepting a big cut in price. That’s why successful investors prefer liquidity over a lack of liquidity. However, unexpected bad news can make liquidity dry up in a heartbeat.

For lasting investment safety, you should buy well-established, prosperous companies like those we recommend in our publications, even Stock Pickers Digest (some of its recommendations do fit that description), and you need to diversify.

The combination of these two factors is much more important than a stock’s recent liquidity.

If you have investment-related questions like these, or if you’d like to ask me about stocks you’re considering buying (or selling), you should join my Inner Circle service. Click here to learn more.