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 investing tips to 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: “How to cut your risk with ‘thin-trading’ stocks.”

Many speculative or aggressive stocks are inactive or “thin” traders. These stocks may trade a few hundred to a few thousand shares daily, compared to hundreds of thousands, if not several million, for a Canadian bank or a major utility, for example.

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

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.

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Stock investing tips: How costs can add up

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 you reduce that risk by being careful about what we recommend. But paying attention to how much a stock trades is one of many important stock investing tips.

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 20 stocks that may be suitable for the part of your portfolio you devote to more aggressive stocks. What’s more, you can get this issue free. Click here to learn how.