How To Make Money In Stocks Part 3: The Illiquidity Premium
By DanielXX  •  March 24, 2008
By: DanielXX There is a premium for illiquidity that can be reaped and should be priced into a thinly-traded stock. This is acknowledged both qualitatively and quantitatively even by academic valuation theory, but common sense will suffice, actually. For a stock that nobody is really interested in, for one reason or another --- even though it does have a certain intrinsic value --- the tendency is for the stock to sink under its own weight below intrinsic value. Firstly, there is unlikely to attract any speculative elements --- hence little overshooting above value; secondly, even institutions tend not to like these stocks because of the fact that they need good daily trading volume so that they can sell without too much market impact should a cash call arise; thirdly, many investors shun these stocks because of opportunity cost of holding; fourthly, many retail investors simply don't know much about these illiquid stocks because brokerages do not provide research on them. Clearly, there is an opportunity for the diligent individual here. Read more... How To Make Money In Stocks Series How To Make Money In Stocks Part 1: Back to the Basics How To Make Money In Stocks Part 2: The Time Horizon Premium
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By DanielXX
DanielXX operates a series of popular stock blogs through which he channels his passion for stock investing. He has been sharing his experiences and views on the Singapore stock market for the past year on these blogs, and is best known for his HotStocksNot site where he makes regular calls against certain hot stocks on the Singapore market. DanielXX considers himself a medium-term investor and focuses on fundamental analysis in his stock-picking approach

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