Investor Toolkit: What you need to know about aggressive investing in “thin trading” stocks

Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific investment advice, including tips for lower-risk aggressive investing. Each Investor Toolkit update gives you a fundamental piece of investing strategy, and shows you how you can put it into practice right away. Today’s tip: “What you need to know about ‘thin traders’” Many speculative stocks, including some of our recommendations in Stock Pickers Digest, our newsletter for aggressive investing, are inactive or “thin” traders. They trade a few hundred to a few thousand shares daily, compared to hundreds of thousands, if not several million, for a Canadian bank. Thin traders are often more volatile than actively traded stocks, especially in reaction to unforeseen news. These aggressive investing stocks may also have a wider spread between the bid (what you get if you sell “at the market”) and the “asked” (what you pay if you buy). The spread may be 2% to 4% or more, compared to 1% or less for an active trader. [ofie_ad] This is more of a cost than a risk. Every time you buy and sell, you have to absorb the bid/ask spread as a transaction cost, on top of brokerage commissions. If you trade actively, this adds up. It’s less of a problem if you hold for a year or two, or longer, as we generally advise. Aggressive investing stocks are often thin traders because they have few shares in public hands, or because brokers don’t do research on them. But, as they grow and prosper, they may sell more shares and attract broker attention. If so, trading expands, the spread shrinks — and the stock price goes up. That’s one more reason why our Stock Pickers Digest aggressive investing recommendations have more profit potential than established stocks, albeit at a cost of extra risk. Next Wednesday, May 18, 2011, Investor Toolkit will show you some common mistakes most investors make—and how to avoid them. If you buy aggressive stocks, you really should have a subscription to Stock Pickers Digest. The latest issue gives you our full analysis, including clear buy/sell/hold advice, on 19 stocks that may be suitable for the part of your portfolio you devote to aggressive investing. What’s more, you can get this issue free. Click here to learn how.