The time of the disorganized, chaotic security market has passed away. However, the idea of earning on low-liquid assets does not need to be forgotten. Such an important feature of low-liquid stocks as their high sensitivity to fluctuations in supply and demand can be actively used by players. How to define whether the asset is low-liquid? How to make money on them? Let’s find out.
What Is Liquidity?
Liquidity is the ability to quickly sell an asset at a market price without discounts. The faster it can be done, the higher the liquidity of the asset. For instance, real estate is a low liquid asset, because you cannot quickly sell a flat at a market price. Even if there is a buyer, it takes time to collect the documents, check everything, and complete a transaction.
Stock market instruments — shares and bonds — are the most liquid assets for an investor. When the exchange is working, securities can be sold without problems, simply by opening a terminal or by calling your broker. A market is considered highly liquid if it regularly concludes deals and the difference between the costs is small, and vice versa.
How to Make Money On Low Liquidity Shares?
As soon as any institutional investor begins to buy many low-liquid shares, their prices start increasing. However, this growth will not last forever, so as soon as the price rises by about a third during one trading session, the stock exchange will suspend this growth.
Such manipulations can last several days or even weeks. Each time at the moment of suspension occurs a decrease in supply. Smaller traders look at the behaviour of a large investor and then wait for the most profitable moment to buy a new batch of shares. The highest profit can be obtained at the peak of the wave.
To imagine the mechanism of action of such a financial wave, we recommend using a simple algorithm:
- Configure your trading terminal in such a way that it finds low liquidity stocks, which manage to rise in price by 30-40% during a day;
- Make a purchase of such shares at this level. Set the Stop Loss. Be patient and wait for the next trading session;
- Rising prices for the next 30-40% suggests that the institutional investor continues to buy shares. Follow his example or just be patient until the next trading sessionю
This is rather a simple strategy, which still requires the ability to analyse. Withdraw your profit or continue the above manipulations until you feel that the wave has reached its peak. The main thing is to stop in time. Good luck!