What is 'Thinly Traded'

Thinly traded securities are those that cannot be easily sold or exchanged for cash without a significant change in price. Thinly traded securities are exchanged in low volumes and often have limited numbers of interested buyers and sellers, which can lead to volatile changes in price when a transaction does occur.

Also known as illiquid.

BREAKING DOWN 'Thinly Traded'

Most thinly traded securities exist outside of national stock exchanges. For example, many public companies listed on over-the-counter exchanges are thinly traded since relatively low dollar volumes are traded hands each day. The lack of ready buyers and sellers usually leads to large disparities between the ask price and bid price. When a seller sells at a low bid or a buyer buys at a high ask, the price of the security can experience significant move. Thinly traded securities are usually more risky than liquid assets because a small number of market participants can impact the price, which is known as a liquidity risk among traders and investors.

There are two ways to determine if a security is thinly traded:

  • Dollar Volume - Dollar volume tells investors how many U.S. dollars are being traded on a given day. Securities with low dollar volume may be considered thinly traded compared to those with higher dollar volumes.
  • Bid/Ask Spread - The difference between the bid and ask price is usually indicative of a market's liquidity. Thinly traded securities have a wider bid/ask spread than liquid securities.

Thinly traded stocks aren't inherently bad investments, but they involve a greater level of risk than liquid investments. For example, many value investors that look for depressed opportunities may come across thinly traded stocks trading at a discount, but selling a position that doesn't work out can be extremely challenging at a good price. 

Many institutional traders and investors avoid thinly traded stocks since it's difficult to buy or sell stock without alerting other market participants that something is happening. The only exceptions are thinly traded American Depositary Receipts (ADRs) that may be used by institutional traders for arbitrage purposes.

Thinly Traded Stock Example

The following chart shows an example of a thinly traded stock:

Thinly Traded Stock Example Chart

As you can see, the stock is traded over-the-counter and experiences dramatic price movements over time. While there are hundreds of millions of shares traded on some days, it's important to note that the stock trades at just over a penny, which means the dollar value of these trades is relatively small compared to larger blue-chip companies that trade millions of shares each day.

RELATED TERMS
  1. Thin Market

    A thin market is a market with a low number of buyers and sellers, ...
  2. Thin File

    A thin file is a financial designation of having a limited credit ...
  3. Average Daily Trading Volume - ...

    The Average Daily Trading Volume (ADTV) is the average amount ...
  4. Liquid Market

    A liquid market is one where there are many bids and offers and ...
  5. Dollar Volume Liquidity

    The price of a stock or ETF multiplied by its daily trading volume ...
  6. Workout Market

    A workout market is a market maker prediction as to the trading ...
Related Articles
  1. Trading

    5 Top Traded Stocks

    Microsoft and GE are two of the biggest names on this list of stocks that have a consistently high trading volume.
  2. Insights

    A Breakdown on How the Stock Market Works

    Learn what it means to own stocks and shares, why shares exist, and how you buy and sell them.
  3. Trading

    Day Trading for Beginners

    Interested in day trading but don't know where to start? Here are some common day trading strategies, as well as some day trading tips for beginners.
  4. Trading

    The Risks of Trading Low-Volume Stocks

    Low volume stocks may be susceptible to price manipulation and liquidity problems. Beware of these and other risks before trading in low-volume stocks.
  5. Trading

    Essential Strategies For Trading Volume

    Looking to trade using volume? Have a look at these essential tips.
  6. Financial Advisor

    Small Cap Investing: How to Think About Illiquidity

    Do your homework, have a long term view, exercise patience, you'll find that investing in small market capitalization stocks is no riskier than investing in large stocks
  7. Trading

    An Introduction To Securities Markets

    The global securities market is constantly evolving. Discover the most popular market structures currently in use.
  8. Investing

    2 Reasons to Be Wary of New ETFs (IFLY, EQLT)

    Pay attention to the number of thematic and smart beta ETFs that may fail to survive as a result of poor performance and thin trading volume.
  9. Investing

    A Look At Primary And Secondary Markets

    Knowing how the primary and secondary markets work is key to understanding how stocks, bonds and other securities are traded.
RELATED FAQS
  1. What types of stocks have a large difference between bid and ask prices?

    Find out which factors influence bid-ask spread width. Learn why some stocks have large spreads between bid and ask prices, ... Read Answer >>
  2. What number of shares determines adequate liquidity for a stock?

    Learn how the liquidity of a company's shares is generally affected by bid-ask spread and trading volume of shares bought ... Read Answer >>
  3. What are the risks involved in OTC (over-the-counter) trading?

    Learn about the significant disadvantages and risks that are involved for investors seeking to trade in over-the-counter ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  2. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  3. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  4. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  5. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  6. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
Trading Center