This article is reproduced from the Bursa Pursuit website. It’ll be useful if you intend to take part in their Challenge Game which runs from 1 Oct 2007 until 30 Nov 2007.
GOLDEN RULE 5: Trade Only Liquid Shares
Look at the column called Lots Done in your market report. This is the amount of stocks that were traded on the day. If you multiply this by the price of the stock, you can see how much money actually changed hands on that day. If this amount is high, then the stock is very liquid, meaning it is easy to buy and more importantly, easy to sell. The last thing you want once you’ve bought a stock is to be stuck with it because you can’t find a buyer.
For example, if a company has traded 100,000 stocks today and the closing price was RM2.42, we can estimate that RM242,000 worth of that stock changed hands today.
For example:
Innovics’ last price was RM 0.30 and Lots Done were 1000. This means that an average of RM 3,000 worth of stock changed hands today. In other words, Innovics is only trading an average of RM3,000 of shares each day.
Now, you own RM10,000 worth of Innovonics and you want to sell. If you enter your sell order on the market, you will inject 3 days worth of turnover onto the
market. There will not be enough buyers for you to immediately sell the
stock at your chosen exit price.
To ensure you invest in liquid shares, only trade stocks that show a daily turnover of at least ten times what you are planning to invest. If you are investing RM10,000 in a stock, look for an average daily turnover minimum of RM 100,000.
Learn about Investing content courtesy of IntegraStock, the creators of a proprietary trading software for successful trading.
