These shares cannot be sold or exchanged for cash easily without significant price changes. Thinly traded securities are less common and more limited in volume. These securities can experience volatile price changes when a transaction takes place. These securities are sometimes referred to "illiquid". These securities are less liquid and trade at lower volumes. Thinly traded securities trade often on over-the-counter exchanges.
Wide spreads in bid-ask spreads and low volumes can make thinly traded securities difficult to identify. These securities are generally more risky than liquid investments. Thinly traded securities are often found outside of national stock exchanges, as mentioned previously. This is why there are often larger discrepancies between the asking and bidding prices due to a lack of buyers and sellers.
The securities price can move significantly if a seller sells the security at a lower price or a buyer buys it at a high asking price. The market price is easily affected by a smaller number of participants, which creates liquidity risk. Thinly traded securities are therefore more risky than liquid assets.
Thinly traded shares have a higher ask/bid ratio which in turn means greater profits for dealers. The bid and asking prices are fundamentally different. Sellers receive the asking price, while buyers pay the asking price. This subtlety is what traders use to earn their revenue through a bid-ask spread. Traders simply buy stocks at the asking price, and then sell them at the bidding prices. The spread is directly proportional with the amount of earnings.
Illiquidity can be easily measured using a bid/ask spread, but liquidity risk is more difficult to predict and grasp. There is always a chance that the spread could grow to a worrying size. Worst-case scenario: the investor will lose money and the security that is thinly traded must be sold quickly. A thinly traded security could lead to more problems. An investor trading in thinly traded shares may not be able to sell their position. This could prevent them from paying their outstanding debts.
An investor's credit risk is increased by being in liquidity. Thin trading is easier for investors who adopt a buy-and hold strategy. They are not interested in selling or buying securities quickly and have less difficulty with thin trading. This is true for bond investors using a buy-and hold strategy, as well as those who simply wait for their bonds to mature without worrying about price movements.
Thinly traded securities can have some advantages when trading. First, there's the possibility of short-term appreciation in thinly traded securities. Imagine a stock that is thinly traded suddenly attracts investors' attention. Even a small increase in demand could trigger huge growth in share price.
Imagine a stock trading at 2000 shares per day and then a positive article about it appears in a respected financial journal the next day. The positive coverage could drive the share price up to 10000 shares per day, driving it significantly higher within a few days. It is possible to make large profits if you hold on to the stocks that aren't widely traded before they gain popularity.
Second, you can repurchase thinly traded stocks at bargain price during market dips. The thinly traded example shows how they can be purchased at a bargain price. Let's suppose an investor decides to sell a large percentage of their shares in a stock that is not traded. The price of the shares will likely drop as the demand for them may exceed the supply. If you plan to acquire additional shares of a security that is not traded extensively, you should watch out for price drops so you can grab the shares at a bargain.
The high-risk, lucrative trade of thinly traded securities is a way to trade low volumes and leverage high volatility but with high risk. These securities are volatile and can be used to gain capital appreciation in both the short-term and long-term.