Investor's Business Daily, April 13th, 2007
You probably don't buy or sell half a million shares at a clip. But you still want to see solid daily volume in the stocks that you own.
Why? Thinly traded stocks are vulnerable to wild price swings, which can be caused by a mutual fund, pension fund or another major investor that trades big blocks of shares. It's also tougher to buy thin stocks at a desired price, since they tend to have wider bid-and-ask spreads.
That's why the big money looks for liquidity in stocks. It can take a large fund weeks or months to build a position in a stock with low average daily trading volume. It can also take too long to get out of a position.
Mutual funds and other big investors help drive a stock's price up as they accumulate shares. Since institutional investors account for more than three-quarters of a stock's price-and-volume action, you want them on your side.
Let's say the market turns bearish. You don't want to get stuck holding a falling stock because there's no one willing to buy it. But if the stock has high liquidity, you should have an easier time unloading shares.
At the very least, you'd want to see a stock trading on average daily volume of 100,000 shares. For smaller-cap stocks, insist on several hundred thousand shares or more each day. Also, stick with stocks trading at $10 a share or higher. Stocks priced at $15, $20 or more are even more attractive to the big guys.
Where can you find a stock's average daily volume? Stock charts at investors.com show average trading volume over the past 50 days.
In IBD's NYSE and Nasdaq Stocks On The Move, you can see stocks with high volume vs. their 50-day average, which indicates heavy institutional action. These stocks must have an average daily volume of at least 60,000 shares and be priced at $20 or more.
The chart to the right shows leading stocks less than 15% off 52-week highs. The stocks are priced at $20 or higher, own a Composite Rating of 95 or better, and have an average daily volume of at least 300,000 shares. You'll likely recognize most of them as regulars in the IBD 100 and Your Weekly Review.
Copyright 2007 Investor's Business Daily, Inc.
