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Investments

It’s Best to Avoid Thinly-Traded Stocks

October 21, 2019

by Howard Haykin

 

 

Thinly-traded securities, often called “penny stocks,” are those that cannot be easily sold without causing a significant change in price. Issued by small companies that have under $10 million in assets and 500 or fewer investors, these securities typically trade outside (or away from) national stock exchanges.

 

By contrast, liquid investments are investments that can be easily sold without having a significant impact on their values – think ... money market funds and shares of publicly-held companies that actively trade on an established stock exchange.

 

While ‘thinly-traded stocks’ aren’t inherently bad investments, they can be riskier than so-called ‘liquid investments’, in that:

  • Investors owning thinly-traded securities may be forced to take a loss if they need to sell quickly.
  • In some cases, they may not be able to sell the security at all.

 

 

The Securities and Exchange Commission (“SEC”) recently took action against 18 traders – primarily based in China – who, from 2013 to present, manipulated the prices of more than 3,000 thinly-traded securities. By creating the false appearance of trading interest and activity, these traders artificially boosted or depressed stock prices of selected stocks, enabling them to make over $31 million in illicit profits – at the expense of small 'mom and pop investors'.

 

 

HERE’S HOW A TRADING SCAM WOULD GO DOWN.    Using different brokerage accounts, traders would place several small sell orders to depress the stock price. They then would buy larger amounts of that stock through other brokerage accounts - all at the low prices they created. AT THAT POINT, THE TRADERS FLIPPED THE SCRIPT - placing several small buy orders (to artificially raise the share price) and then unloading their share positions at the artificially high prices (to reap large profits).

 

Mom and pop investors in these thinly-traded stocks are the unwitting victims in these scams by buying shares at high prices and selling shares at low prices.

 

 

INVESTORS BEWARE!   Individual investors should avoid getting suckered into buying thinly-traded or penny stocks. They’re better off buying shares of large, well-known companies or baskets of stocks - like mutual funds or ETFs (exchange-traded funds).