Illiquid stocks are high-risk stocks and are challenging to sell because of the expense, lack of interested buyers, and other factors. Examples of illiquid assets include real estate, stocks with low trading volume, or collectables. Illiquid assets still have value and, in many cases, very high cost, but are challenging to sell. Investors cannot find ready buyers because of the limited trading of illiquid stocks.
Illiquid stocks have lower trading volumes with limited investors. Generally, they include small stocks which cannot be realised quickly. Now that you know what is an illiquid stock let’s find out how you can identify one.
How to identify illiquid stocks?
1. If institutional investors show less interest in stock; it is a sign of low performance in terms of return.
2. If the stock does not have enough trading volume daily, the chances are that the stock is going to be illiquid.
3. If the stock is hitting lower value regularly, it is an indication of illiquid stock.
4. If there is a massive difference between the bid price and the asking price, the chances are that the stock is illiquid.
Illiquid stocks are the ones which have negligible trading and cannot be sold immediately. Illiquid assets give higher yield but are hard to sell as compares to liquid assets. Even if there is a quick sale, it may not be without a substantial loss in value.
These assets and securities cannot be readily converted into cash. Another reason why illiquid assets may be hard to sell is that there is a low trading activity or interest in the stock, indicated by a lack of ready and willing investors to purchase the stock. As a result, illiquid stocks might have lower trading volume, wider bid-ask spreads, and higher price volatility.
Illiquidity for a business refers to a company that does not have the cash flows necessary to make its required debt payments. Real estate, capital assets have great value but are not quickly sold when cash is required.
In case of unforeseen circumstances or emergency crisis, a company may need to liquidate these assets to avoid bankruptcy. If this happens quickly, it can dispose off assets at prices far below an orderly fair market price.
At Angel Broking, we strive to give individuals the best research and online calculator tools to help them make the right stock-market decisions. In this way, retail investors can avoid illiquid stocks in their portfolio or hold off on selling them too quickly.