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 stock trading advice that can help you reduce the risk of more 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: “Although risk and volatility are magnified with thinly-traded stocks, if you can identify the stocks that will grow and prosper, the rewards could be tremendous.”

Many speculative or aggressive stocks may trade a few hundred to a few thousand shares daily. That’s why they are called “thin” or even inactive traders compared to the hundreds of thousands, if not several million shares trading daily for a Canadian bank or a major utility, for example.

You’ll find some stocks like these among our recommendations in Stock Pickers Digest, our newsletter for aggressive investing. Here’s what you should know about them.

With fewer transactions taking place in their shares, thin traders are often more volatile than actively traded stocks, especially in reaction to unforeseen news. These 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.

When you get Pat McKeough’s Pick of the Month in Stock Pickers Digest, you have a chance to get in on a stock that’s ready to surge. Just one example: one of Pat’s top picks, Aastra Technologies, agreed to a takeover last December and more than doubled from the time he picked it, rising 104%.

Last week Pat released his latest Pick of the Month. Subscribe to Stock Pickers Digest now and get all the details on the stock Pat sees as a big winner in the crucial weeks ahead. And you immediately start getting updates and recommendations every week in our Email Hotline.

Now is the time to act on stocks that are ready to rise. As a new subscriber, you can save $50.00 on a risk-free introductory subscription to Stock Pickers Digest. Click here to begin your no-risk subscription right away.

Selling more shares attracts the attention of brokers

This wider spread 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, these costs add up.

It’s less of a problem if you hold for a year or two, or longer, as we generally advise.

Speculative 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 this increase in liquidity makes the stock more attractive to successful investors. As a result, the stock price may go up.

That’s one reason why we include some thinly traded stocks in with our Stock Pickers Digest recommendations. The best thinly traded stocks have the potential to graduate into the ranks of the more actively traded, and this gives them slightly more profit potential than established stocks, albeit at a cost of extra risk.

We try to help reduce that risk by being careful about what we recommend. But paying attention to how much a stock trades is one of many important indicators in picking successful stocks.

COMMENTS PLEASE—Share your investment knowledge and opinions with fellow TSINetwork.ca members

Have you had any breakthroughs with thinly-traded stocks? Have you had any particularly disappointing results with them? Are you willing to devote a portion of your portfolio to speculative, less liquid and more volatile stocks? Or do you only buy such stocks on rare occasions?