What Makes a Stock Illiquid? Let's Find Out

Investing in the stock market can be a great way to grow your wealth and diversify your portfolio. However, the stock market can be a tricky place to navigate, especially when it comes to understanding the illiquid stock market. Illiquid stocks are stocks that are less easily traded than other stocks, and they can be risky investments if you don’t know what you’re doing. So,  it’s important to understand the basics of the illiquid stock market and the risks associated with it. In this article, we are going to learn about illiquid stocks, what you need to know about the illiquid stock market, illiquid stocks meaning,

This article covers:

• What is illiquid stock?
• How to identify illiquid stocks? 
• Top list of illiquid stocks NSE (Data as of 12 December 2022)
• Advantages of owning illiquid stocks
• Things you need to consider when investing in illiquid stocks

What is Illiquid Stock?

Illiquid stock refers to a type of security that cannot be easily converted into cash. This means that it can be difficult to find someone who will buy or sell the stock at a fair price, which can make it difficult to trade. As a result, illiquid stocks tend to have a lower value than liquid stocks.

The main reason why illiquid stocks are unpopular among investors is that they can pose a lot of risks. For example, if you need to sell your shares quickly to cover an emergency expense, you may not be able to find a buyer at a price that is acceptable to you. So, it is important to think carefully before investing in illiquid stocks.

Key takeaways: 

• Illiquid stocks are shares of publicly traded companies that are difficult to buy or sell due to a lack of interested buyers or sellers in the market.
• Investing in illiquid stocks can be risky because it is difficult to buy or sell these stocks quickly in response to changes in the market.
• Illiquid stocks have the potential to provide high returns if the company's fortunes improve.

How to identify illiquid stocks? 

1. You can identify an illiquid stock by looking at its daily trading volume. The trading volume shows the number of shares that are traded on a given day and can be found on most financial websites or stock market apps. A stock with a low daily trading volume may be considered illiquid, as there may not be enough buyers and sellers to support significant price movements. 
2. Another sign of an illiquid stock is a wide bid-ask spread. A wide bid-ask spread may indicate that there is a lack of liquidity in the market for a particular stock, as there may not be enough buyers and sellers to bring the bid and ask prices closer together.
3.  Lack of recent price movement or volatility can also be a sign of an illiquid stock. Stocks that do not move significantly in price over time may be considered illiquid, as there may not be enough trading activity to support significant price changes.

Top list of illiquid stocks NSE (Data as of 12 December 2022)

Advantages of owning illiquid stocks:

• Potential for higher returns: One potential benefit of owning illiquid stocks is the potential for higher returns. Because illiquid stocks are often less well-known and may be overlooked by many investors, they can sometimes be undervalued. As a result, they may have the potential to generate higher returns if the company's financial performance improves or if the stock becomes more widely recognized and its value increases.
• Buy shares at a discount: The advantage of owning illiquid stocks is the ability to buy shares at a discount. Because there may not be as many buyers and sellers in the market for an illiquid stock, it may be possible to purchase shares at a lower price than what the stock is worth. This can provide an opportunity to buy shares at a discount and potentially realize a profit if the stock's price increases in the future.
• Tax benefits: Illiquid stocks offer investors certain tax benefits, such as the ability to claim losses on them in certain circumstances.
• Diversification: Illiquid stocks can provide investors with additional diversification within their portfolios.

Things you need to consider when investing in illiquid stocks

• Limited liquidity: When you own illiquid stocks, it becomes difficult to sell when you need to raise cash quickly. This can lead to liquidity problems and force you to sell your assets at a discount.
• potential risks and rewards: As with any investment, there is always the potential for both gains and losses. Illiquid stocks may be particularly risky because they are often less well-known and may be subject to greater price volatility. It is important for investors to carefully evaluate the potential risks and rewards before making any investment decisions.
• Risks associated with holding assets that shares cannot be sold easily: Another risk associated with holding illiquid assets is that you may not be able to recover all your investment if something goes wrong. This could occur if the company went bankrupt or there was a natural disaster that affected the business.
• Financials of the company: Investors should also consider the financial health and performance of the company when considering an investment in illiquid stocks. It is important to carefully research the company and its financials to get a better understanding of its business model, financial performance, and potential risks and rewards. This can help investors make more informed investment decisions and better manage their portfolio risks.

To conclude, illiquid stocks are shares of publicly traded companies that are difficult to buy or sell due to a lack of interested buyers or sellers in the market. These stocks can be risky to invest in because it is difficult to manage the risks associated with them, but they may also have the potential to provide high returns if the company's fortunes improve.