How to buy and sell small illiquid companies

//How to buy and sell small illiquid companies

 

dear fellow investor (blue)

 

 

borkernewHow to buy and sell small illiquid companies  

A while ago I received this really good question from a subscriber:

It is not always simple to implement your suggestions because of the liquidity of some shares (for buying as well as for selling!). Perhaps you can give some advice or suggestions about orders and liquidity in one of your future newsletters.

 

This is a very good question as some of the companies I have recommended in the newsletter are quite illiquid, and this despite of the newsletter only looking for investments that have traded at least €100,000 per day over the last 20 to 30 trading days.

Here are some ideas for how you can get the best buy and sell prices.

 

Limit Orders

A limit order lets you control the price at which the order is executed.

As the name suggests, with a limit order, you tell your broker to buy or sell a security at a maximum or minimum price. The order will only be executed if the price is within the limit you have set.

For example, if you set a buy limit order for €50 but the current market price is €60, the order will not be executed unless the price drops by €10 to €50.

You can thus use a limit order to set your buy and sell price exactly.

Note that you may need to pay a slightly higher commission when you place a limit order. But if the volume traded in the company is low, it is always worthwhile.

You must also keep in mind that with a limit order your order will never be executed if the price you set is not reached.  For example, if you set a sell limit order at €40 and the current price of the stock is €30 and it does not reach your limit, your order will not be executed.

Also a buy limit order will only be executed at the limit price or lower.

 

How I use limit orders

This is how I use limit orders.

I enter my limit order, usually valid for at least two weeks, and then follow the share price closely.

If the share price moves away from my limit order (moves up above my buy limit price or down away from my sell limit), I may adjust my limit order if this happens over a few days. If not, I will just wait for the order to be executed.

 

How to keep dealing costs low

If part of my limit order has been executed – for example of my order of 1000 shares, 100 have been bought or sold – I will change my limit order price so that the whole order is executed. This is to avoid my order being executed over a few days, in which case I would have to pay the minimum broker costs every day.

If 80% of my buy order has been executed and the price has moved away a lot from my limit price, I will simply cancel the rest of my order and live with a smaller position.

When selling, this is different as you usually want to exit the investment completely. So if 80% of a sell order has been executed and if the price has not fallen too much, I will just sell the remaining 20% at the lower price rather than be left with a small investment in my portfolio.

Before selling at the lower price, you must compare the lower price with the minimum broker costs. If the broker costs are small compared to the amount of the 20% position remaining, I recommend that you not sell but watch the share price closely as you may be better off selling the rest of your investment the next day at your limit price.

 

Tip – How to sell if the price is far away from your limit

Here is a great tip I got from a broker (thanks Vaughan) on how you can you sell an position if the buy (bid) price is a lot lower than your limit.

Sell a small number of shares (small amount) to the buyer at the low price. Because of the fall in price, other buyers will become interested and will offer to buy at a better price.

You may have sold a few shares at a very low price, but you will get a much better price for the rest of your investment.

 

“Fill or Kill” and “All or None” orders

It is also possible to further restrain buy and sell limit orders. This can be done with Fill or Kill (FOK) and All or None (AON) orders.

When you place a FOK limit order, it will either be executed in full or cancelled (executed in full here means buying or selling the exact number of shares you ordered).

On the other hand, when you use an AON limit order, it will only be executed if your broker can buy or sell the exact number of shares you ordered. And if it cannot be filled, it will not be cancelled (as is the case with a FOK order), but will be held for later execution for as long as the order is valid.

 

The AON is a very good type of order to use when you are buying or selling illiquid shares as it helps you avoid high dealing costs. It will avoid multiple transactions of small amounts of shares that can be very expensive in terms of brokerage.

Unfortunately this type of order is not available from all brokers or on all stock exchanges.

 

Wishing you profitable investing

 

Blue writing_signature option 2

 

 

 

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By | 2017-05-21T07:19:00+00:00 December 8th, 2015|