Thinly Traded (Securities) - Explained
What is Thinly Traded?
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Table of ContentsWhat is Thinly Traded?How Does Thinly Traded Work?Risks of Thinly Traded InvestmentsKEY TAKEAWAYSReal World Example of Thinly Traded
What is Thinly Traded?
The term Thinly traded is used in securities trade to describe securities that realize low dollar volumes for a trading day. Thinly traded securities are volatile in terms of price, this is due to a limited interest that buyers show for their purchase. When an investor finds it difficult to sell his securities or investment holdings in a short period of time, such securities are thinly traded. Also, securities that cannot be easily traded near their value are thinly traded, this means such securities are sold or exchanged for a price below their value.
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How Does Thinly Traded Work?
Generally, thinly traded securities are illiquid securities because these securities are exchanged in low volumes. Thinly traded securities are not easily sold or exchanged and buyers show interest in purchasing them, it comes with a significant change in price. Thinly traded securities are not common on national stock exchanges, rather, they are mostly found on the over-the-counter exchange which is traded outside of the stock exchange. Traders of thinly traded securities end up selling their securities for prices well below the value of the stock. There are several risks attributable to thinly traded securities, one of the mar risks is illiquidity. Thinly traded securities usually have more risks than other securities and liquid assets. It is important to be able to distinguish thinly traded securities fro normal securities, there are two ways to know thinly traded securities, these are;
- The dollar volume: When security is traded at low dollar volume, it is thinly traded, the dollar volume of security is an indicator of whether it is thinly traded or otherwise.
- The difference between the bid price and the ask-price is another metric that shows whether a security is thinly traded. This is often called the bid-ask spread.
Risks of Thinly Traded Investments
Investors choose investment instruments for the purpose of making profits. Thinly traded stocks or investments do not present the perfect opportunity for investors to make a profit, rather, they come with a high level of risks and are sold for low dollar volumes. They often avoid thinly traded securities or stocks, not only because of their illiquidity but because they are seen as bad investments. Buying or selling thinly traded stocks is difficult because they are seen as bad investments and investors avoid them. Investors that have thinly traded investments are likely to accrue a loss because the investments are sold or exchanged at a discount or an unfavorable price.
Here are some important points you should know about thinly traded stocks or securities;
- Thinly traded securities are securities that cannot easily be sold or exchanged. Low volume trade, a significant change in price and general volatility of the securities are the features of thinly traded stock.
- The metrics that investors and individuals use in determining thinly traded stock are dollar volume and bid-ask spreads.
- Thinly traded stocks are illiquid and regarded as bad investments by investors.
- Thinly traded stocks are not common on national stock exchanges, they are prevalent on over-the-counter exchanges.
Real World Example of Thinly Traded
The common risks associated with thinly traded stocks are highlighted below; Thinly traded stocks have high volatility when compared to liquid investments and securities. Also, they are traded with a significant change in price that alert other investors. Generally, thinly traded stocks are avoided by individuals or institutional investors in the stock exchange market. Furthermore, thinly traded stocks have low dollar value when compared to other stocks, there is also a relatively low volume trade of these stocks.