Should You Gamble on Less Active Stocks?

Wynn Resorts (WYNN) has gotten a lot of attention recently, to a large extent because of its growth in Macao, the largest gaming region in the world. How much does institutional buying affect the stock when it makes important announcements or releases earnings? Probably a lot: Wynn only trades 2 million shares a day, so in theory, the sale of big blocks of shares could move the stock a great deal. Wynn's 52-week high/low is $72/$151, a very wide spread.

Similarly, retailer Costco (COST) trades only 2.4 million shares a day. Monthly sales data can move this stock a great deal in a short period of time because the shares are thinly traded compared to other large retailers. Costco's stock rose from $70 on March 16 to $78 on April 7, thanks to excitement about improved earnings. Does it matter that the large change in the number of shares it trades when it issues results tends to move its stock price more than might be the case with a widely traded competitor like Walmart (WMT)?

Street Directory recently made the argument that if investors want some degree of price stability, they should buy stocks which have heavy daily trading volumes. "Stocks with a high volume are very liquid, not to mention they have lower spreads between the bid and ask prices. Technical analysis works best on liquid stocks because trends are more fluid and give more data on which to base a decision," its article pointed out. Stocks with less liquidity tend to experience more price swings on volume spikes. For example, a small biotech that releases good news can rise 50% in a day as traders move into the stock.

Is the argument that highly liquid stocks are more stable than those with fewer shares true? Probably, because the fundamentals of supply and demand rule trading as they do most economic transactions.

But this leaves the investor with a decision: Does he prefer the potential of sharp moves up or down that comes with a stock whose normal daily volume is modest? The risks involved are considerable, but so are the potential rewards.

Investors who would rather count on a stock's tendency to trade within a relatively small range should stick to the "most actives." These are usually large companies that also tend to pay dividends -- another source of steady returns. The most active list usually includes the largest banks, such as Bank of America (BAC), and multinationals like GE (GE), Microsoft (MSFT), and AT&T (T) -- stocks that are unlikely to be roller coasters.

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May 28 2011 at 11:45 PM Report abuse rate up rate down Reply


May 20 2011 at 4:21 PM Report abuse rate up rate down Reply

Hear that hiss? You can almost hear the dollar deflating. Soros is buying up Gold and Aol is advising you to buy weak "less active" stocks. Gamble is the key word with the stock market. And the odds are stacked against you.

May 18 2011 at 8:46 AM Report abuse +2 rate up rate down Reply

I am going ALL-IN on Sandridge Energy (SD)... The flooding in Mississippi and Louisiana is
going to send the $10.00 stock through the roof very soon........ Even the last 3 days analyst
reports say the same thing.

May 18 2011 at 8:42 AM Report abuse rate up rate down Reply

The only place to put your money is in your mattress, if you put a penny in this corrupt market you deserves lose every bit of it!!!!!!!!!!!!!!!!!!!

May 18 2011 at 8:03 AM Report abuse rate up rate down Reply

Good night Bushy dear. It was fun. Although I really wish you would stop flirting with me dear. I have enough liberal loons in my life. Bye Bye.

May 18 2011 at 1:31 AM Report abuse +3 rate up rate down Reply

It probably would have been less embarrassing for me if I would have dropped out instead of getting fired. Oh how embarrassing.

May 18 2011 at 1:28 AM Report abuse +2 rate up rate down Reply

President Obama called American citizens the enemy. Imagine calling the people who you work for and are suppose to serve the enemy. How reprehensible. It just shows the lack of respect that we liberals have for the American people.

May 17 2011 at 11:16 PM Report abuse rate up rate down Reply
1 reply to mrspelosi's comment

"That must why" ?? Did you fall off the wagon again dear?

May 18 2011 at 12:35 AM Report abuse -2 rate up rate down Reply

MS. PELOSI FOR PRESIDENT. She is sooooooooo much smarter than when she was Speaker.

May 17 2011 at 10:05 PM Report abuse +4 rate up rate down Reply

The American people gambled on the democrats in 2008. It's been downhill ever since.
The American people lost big time! Remember you heard that straight from the horses
mouth. Literally!

May 17 2011 at 7:15 PM Report abuse -2 rate up rate down Reply
2 replies to mrspelosi's comment

The lunatic left tries to make everything sound wonderful. America knows better, Ms. Pelosi. Sorry, your party is over.

May 17 2011 at 10:01 PM Report abuse rate up rate down Reply
1 reply to savemycountry911's comment

Bushy yes you're right the democrats are a bunch of pinheads. I'm queen pinhead.

May 19 2011 at 12:18 AM Report abuse +1 rate up rate down

Ms. Pelosi rules. Maybe she should be president.

May 17 2011 at 10:03 PM Report abuse +1 rate up rate down Reply