The Value Investors Guide to Buying Illiquid Stocks

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Jae Jun

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Buying Illiquid Stock – A Short Guide

AEY: 9,978
GRVY: 20,003
RHDGF: 363
YNGFF: 21,209
IEHC: 2,402

These are my illiquid holdings and their respective 30 day average volume.

Scary huh?

Compare that to something like this.

AAPL: 16.84M

But I managed to buy all of them for the full position I wanted despite the low volume.

So if you buy small caps or just fear buying illiquid stocks because your money will be “stuck”, read on.

Inverting the Typical Line of Thought

Let’s do a Charlie Munger and turn the definition of illiquid stocks upside down for a sec.

Are Coca Cola, Amex, Wells Fargo and IBM illiquid stocks?

Yes they are.

To Warren Buffett they are. In fact, every stock is illiquid to him. For big buyers, all stocks are illiquid so there is no reason to believe in the myth that your money is lost because you can’t take it out.

If you manage to buy a hidden gem and the price starts to creep up, people notice and so does the volume.

With GRVY, as anticipation grew for the release of RO2, a horde of people suddenly bid the price up.

Volume spiked.

I could have sold, but I didn’t. Stupid me, but that’s a prior mistake.

Illiquid Stocks Are Not as Illiquid as You Think

Geoff Gannon has written a lot on how to buy illiquid shares, and that’s where the idea for this post came up, so I’ll be using some of the ideas that he has brought up in the past.

Say you wanted to buy into AEY.

The last closing price is $2.30 with an average monthly volume of 10,000 shares. (I’m rounding off numbers to make it easier to follow)

This means that in an average month, $23,000 worth of stock is traded. $23,000 in a month is more than enough to build a position around.

The only problem is that you aren’t the only one waiting to buy the stock. There are other smart people like yourself that knows value when they see it.

The trick is to be patient.

Put in a limit order, set it to Good Til Canceled and then forget about it. Don’t bid up the price and be the greater fool that pays the higher price.

As you can see below, illiquid stocks don’t move in a linear fashion.

Buying Illiquid Stock

A short guide on Buying Illiquid Stock

Set your limit price and forget it, because there is a good chance that you will get your fill.

Ben Graham Already Taught You About Mr Market

Even for low volume stocks like AEY, there is enough volume for most investors to take a full position. Remember that the public market is like a real market.

There are buyers and sellers.

Somebody like you is on the other end, holding out their goods (the shares) for sale. Just like how you would haggle at a real market, you should do the same. Don’t accept the asking price.

Put your bid out there and if the seller is desperate and wants to clear his goods, your bid will get filled.

Too Late. You Missed Out.

The only enemy when it comes to buying illiquid stocks is yourself and the psychology of missing out. I’ve done it myself. I put in a bid and then after 30 minutes of not getting it filled, I increased my bid slowly and eventually bought at 3-4% above my initial price.

At the end of the day, the stock had actually dropped 3-4% below my initial starting price. So I’m already starting down 6-8%. Way to go.

This sense of missing out, getting urgent is what causes you to buy at a higher price.

Companies use urgency all the time making you feel like you are going to miss out.

Say you found a good looking laptop bag at Zappos.com. The quality is excellent and best of all, it’s on sale.


Your eyes roam to the add to cart button, but above it, there are the words, “only 2 in stock”.


The airlines do this all the time too – “Only 4 tickets left at this fare”.

Now that you are aware of the psychological behavior when it comes to buying shares, consciously make the effort to set your price and walk away.

Do that in a live market and the seller will run out to sell his goods to you.

Tips to Grabbing Illiquid Shares of Great Companies

  • Always buy stocks using the limit order
  • Use the good til canceled option
  • Don’t use All or None. If you are trying to buy 1,000 shares, what’s the chance that you will get all 1,000 shares in one order? Build your position in blocks if you have to. That’s why you need a good discount broker with cheap fees like optionshouse. $3.95 per trade. Yum.
  • Try to keep commissions below 1% of your order. Again, it’s why I use optionshouse. As long as my order blocks are at a minimum of $400, I don’t have to worry about fees eating my returns.
  • Don’t bid up stocks. Set it and forget it. You should get an email notification if a trade goes through.
  • A stock is always liquid enough for small investors.
  • If the stock price of AEY is $2.30, instead of putting in a bid price of $2.30, put in something like $2.31 or $2.32.
  • If you want to sell a stock like AEY, put in something like $2.29 or $2.28 to make the probability of the trade going through higher.
  • Most important of all, chill out and take it easy.

That’s a short guide on Buying Illiquid Stock.

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10 responses to “The Value Investors Guide to Buying Illiquid Stocks”

  1. kumud says:

    nice article, I use optionhouse and I buy all stocks limit order only. 5 years of investing and I never paid market price. Pick a price and wait works all the time, same goes for selling as well. I set price and forget it.
    Sometimes I did not get the price I want but whats the big deal, I will find another stock.
    sometimes I sell soon but hey did not loose money so why cry 🙂

    I can also relate to missing out psychology too. If you chase a bus then it will go away leaving you panting however if you stand where you are in few minutes another one will come. Works wonders for stocks

  2. scoran says:

    Larger positions will have difficulty getting filled, so understanding typical order sizes could be a help in filling quicker. Trading platforms with level 2 data can give you some idea.

    As for taking a “set it and forget it” approach with limit orders, that could lead to problems. A limit order reduces your available capital, so you may miss out on other opportunities – say a higher-volume stock you’ve been watching has a sudden pull-back. Limit orders can leave you stuck at a higher price if the stock decreases suddenly, and some low-volume stocks take a long time to recover. Not an issue if you plan to hold for a couple of years, but for shorter time frames it could be an issue.

  3. ken says:

    “Say you wanted to buy into AEY. The last closing price is $2.30 with an average monthly volume of 10,000 shares. This means that in an average month, $23,000 worth of stock is traded.”

    This doesn’t negate the value of the article, but average monthly volumes are actually daily volumes, not monthly. AEY trades approximately 10,000 shares a day in an average month (although Yahoo shows 12,500 as its 3-month average, rounded). So it isn’t quite as illiquid as it might first appear (though that’s still thinly traded).

  4. spbrunner says:

    Great Article. I had not thought of using the buy until cancelled feature.

  5. That’s a good point. Always a good idea to have some extra cash instead of being fully invested. I personally haven’t experienced such a problem as I rarely buy more than two stocks at the same time.

  6. Thanks. Will keep that in mind.

  7. It’s the only one I use. I find a stock I like, set the price I want to buy it for and then forget about it. If a transaction goes through a couple of weeks later, I get a notification and that’s that.

  8. Great analogy of the bus. Set it and forget it works every time.
    Although I’ve set one order for 5 months and it still hasn’t gone through..

  9. Webuchadnezzar says:

    I’ve been investing since 1980 and have come to adopt some of the methods discussed in this article. My biggest gain ever was in a low volume stock.

    I built up a fairly big position in, slowly over time, buying with limit orders just like this man says. A low volume stock can languish for years. Eventually, only the “True Believers” are left.

    Sometimes, the volume drops off completely, since TB’s are not selling and their ask is too high for any new buyers to tolerate.

    I have had many stocks with a volume of zero, or my buy order being the entire day’s volume. In my biggest winners, I was patient for years, as profits grew but the price stayed rangebound.
    Patience paid. Suddenly the stock makes somebody’s radar screen. An article is written and an analyst announces a Buy rec and low volume is a thing of the past. The stock makes Yahoo’s top gainers and volume explodes. I no longer fear low volume stocks.
    If the balance sheets are strong and growing, that’s mainly what I care about.

  10. Great stuff.
    That’s exactly what I’m talking about.
    If the stock is good, volume doesn’t matter because all of a sudden, everyone will want to be buying it.

    That’s the perfect to time exit.

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