Sunday, April 11, 2010

Stocks With Little Trading Volumes

For those who don't know yet, here is a list of my current holdings.

1. Action Asia: 10 lots @ $0.148
2. Asiatic Group: 5 lots @ $0.086
3. Biosensors International: 3 lots @ $0.517
4. China Animal Healthcare: 4 lots @ $0.272
5. Elite KSB: 16 lots @ $0.206
6. Etika International: 10 lots @ $0.360
7. FJ Benjamin: 4 lots @ $0.127
8. GMG Global: 20 lots @ $0.096
9. Stratech: 21 lots @ $0.051
10. TPV Tech: 2 lots @ $0.514
11. UOB-KayHian: 3 lots @ $1.26

Most of them have low liquidity in terms of trading volume - Biosensors, China Animal Healthcare & GMG Global being the exceptions.

Why do some stocks have thin trading volumes? 2 main reasons are: 1. Low public float with most of the shares in the hand of the founding family. For some strange reasons, the company's founding fathers want to list their company, but are afraid that they will lose control of it. So they IPO with most of the shares placed to institutional investors, and maybe just enough to the public to meet the public float.

2. Lack of an exciting story. You might be surprise, but this happens to some of the penny stocks like Stratech and GMG Global at some points in time, mostly because their theme isn't in play. Then after the themes die down, you will find that there are days where shares hardly change hands.

I think low liquidity stocks have good upside potential. But be cautious of putting too much money on such stocks. Moderation is always the important. Because even with the proper risk management in place, you never know when you need to sell off your shares. The worst aspect of illiquid stocks really is their terrible bid ask spread that makes it hard to find a good entry or exit point.

Big cap liquid stocks should make up at least half of any substantial portfolio, preferably dividend paying as well. Too many people try to be an Arsene Wenger - stingy when buying players preferring instead to nurture them when they are young. As you know, he has difficulty getting silverware because he will never know which young guy can live up to the standards expected of them. Just a thought.

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