What it means
Most investors expect to buy or sell quickly near the last price, but in a thinly traded stock there are fewer people on the other side of the trade, so the price you see may not be the price you get. There is no single legal cutoff, so people usually judge by average daily trading volume, the number of trades per day, and the bid-ask spread.
The SEC's Division of Trading and Markets has studied this group, which it calls the lower end of the liquidity spectrum. The SEC's 2018 staff data summary shows how wide the range is.
It covered more than 8,500 stocks in the US national market system, with average daily share volume from zero to nearly eighty million. The data is from late 2017, so it is a dated snapshot.
The summary found that half of all these stocks traded less than 100,000 shares a day on average. Together they made up just under two percent of daily share volume.
A large share of stocks, in other words, trade very little. The spread is the visible cost: Investor.gov defines the bid as the highest price a buyer will pay and the ask as the lowest price a seller will accept, and the gap between them is the spread, which in thin trading is usually wider, so a market order can fill at a worse price.
Price swings are the risk, since with few shares changing hands a single large order can push the price up or down. An investor who wants to sell a large position may find that doing so lowers the price.
Limit orders can help, since a limit order sets the worst price the investor will accept, so it avoids paying more than planned, though it may not fill, or may fill only in part. Thinly traded does not mean poor quality, as a sound small company can trade lightly, and some exchange-traded products do too.
The point is that getting in and out costs more and takes longer.
In practice
Real-world examples.
Example
A fictional stock has a bid of 20.00 and an ask of 20.50. The spread is 0.50, about 2.5% of the 20.25 midpoint. Buying at the ask and selling at the bid right away loses 0.50 per share before any price move.
Example
A fictional investor owns 50,000 shares of a stock that averages 40,000 shares a day. Selling it all in one day would be more than the day's usual volume. The investor sells in pieces over several days to avoid pushing the price down.
Example
A fictional investor places a market order for a thin stock and it fills at 3% above the last trade. A limit order at the last price would have avoided that, though it might not have filled. The investor learns to use limit orders for thin names.
Formula
Calculation
Spread (%) = (ask - bid) / midpoint x 100, where midpoint = (ask + bid) / 2.
Example: a stock has a bid of $20.00 and an ask of $20.50. The midpoint is ($20.50 + $20.00) / 2 = $20.25, so the spread is ($20.50 - $20.00) / $20.25 x 100 = 2.47%.
Days to sell = position size / average daily volume. Example: 50,000 shares / 40,000 shares a day = 1.25 days at 100% of volume, so selling over many days is safer. If the investor limits sales to 25% of average daily volume, each day's sale is 40,000 x 25% = 10,000 shares, and the position takes 50,000 / 10,000 = 5 trading days to sell.Case study
Seen in the real world.
This case study is fictional and illustrative. Omar holds 30,000 shares of a small company that trades about 15,000 shares a day. The bid is 8.00 and the ask is 8.20, a spread of 0.20. If he sold everything at once, he would be offering twice the usual daily volume. He chooses to sell 3,000 shares a day using limit orders just above the bid, which spreads the sale over ten trading days.
On some days the order does not fill and he waits. The average price he gets is close to 8.05, better than the 8.00 bid he would have taken for an immediate sale. The cost is time and the risk that the price moves against him. The lesson is that thin trading turns liquidity into a cost. The cure is patience, limit orders and a plan sized to the stock's volume.
Watch out
Common mistakes.
- Using a market order in a thin stock, which can fill far from the last price when the spread is wide.
- Sizing a position without checking average daily volume, so exiting would take days or move the price.
- Treating a thin stock as a bad company, when light trading says little about its quality.
Questions
People also ask.
What makes a stock thinly traded?
Low average daily volume, few trades a day and a wide bid-ask spread. There is no single legal cutoff.
Why is it risky?
It can be hard to buy or sell at a fair price, and one large order can move the price. Investors may wait or accept a worse price.
How can I trade a thin stock more safely?
Use limit orders, check average daily volume before sizing a position, and split large orders over several days.
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