Thursday, 22 April 2010

Risk of Loss Caused by Infrequent Trading

Investment assets that are seldom traded may be difficult to sell unless you are willing to offer a price concession to attract a buyer.  It is especially difficult to obtain a fair price when you are in a hurry to sell an asset that has little trading activity.

Many stocks are actively traded and offer excellent liquidity to a seller; even when it it necessary to sell the stocks immediately.  At the opposite end of the liquidity scale, some stocks in which limited trading occurs may be difficult to sell on short notice unless you are willing to accept a price that is substantially lower than would be received in an active market.

The ownership of inactive stocks is not a great concern if you are investing for the long term.  The common stocks of relatively small, little-known companies frequently offer an opportunity to earn large capital gains.  Unfortunately infrequent trading caused by a current lack of investor interest means that you may have difficulty disposing of the stock at a reasonable price on very short notice.

  • If you are investing to achieve short- or intermediate-term goals and expect that you will have to sell your stocks in the not-too-distant future, owning stocks that don't have an active secondary market is a risky investment choice.  
  • You can avoid this risk by limiting your selections to stocks that are actively traded on one of the organized exchanges or in the over-the-counter market.

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