Illiquid Stocks Explained: Examples, Risks, & How to Buy Them

Have you ever tried to sell something online, but no one seemed interested in buying it? Maybe an old phone or a rare collectible; it had value, but finding a buyer was tough. 

The stock market works in a similar way. Some stocks are easy to buy and sell, while others sit without much action. These are called liquid and illiquid stocks. 

In this blog, we’ll cover everything about illiquid stocks: what they are, and their examples with liquid stocks. We’ll also explain how to identify illiquid stocks, and the risks involved. Finally, we’ll cover how to buy illiquid stocks. 

So let’s get started!

What are Illiquid Stocks?

Illiquid stocks are shares that are not traded frequently in the market, meaning they have low trading volume and fewer buyers and sellers. Buying or selling these stocks quickly makes it difficult without impacting the price. They often belong to smaller companies, niche businesses, or those not widely invested by the public.

Now that you understand what illiquid stocks are, let’s compare them with liquid stocks through some examples.

Examples of Illiquid Stocks and Liquid Stocks

To understand this better, here are some examples of illiquid and liquid stocks to help you see the difference.

Illiquid Stocks

Illiquid stocks are less frequently traded, which means they have lower demand and fewer market participants. Here are some common examples:

• Aventis Pharma: This stock has seen a sharp decline in trading activity, with average daily volumes dropping to just 223 shares recently, compared to around 7,000 shares earlier. Despite nearly 40% of its equity being held by the public, it remains illiquid.

• Responsive Industries and Hindustan National Glass: Both stocks have been classified as illiquid by the Bombay Stock Exchange (BSE).

• Koutons Retail and Shoppers Stop: Once actively traded, these stocks later became illiquid as market interest declined.

Liquid Stocks

Liquid stocks, in contrast, have higher trading activity and are more widely traded in the market. Examples include:

• Blue-Chip Stocks: Shares of established companies like Reliance Industries, TCS, and Infosys typically have high trading volumes.

• Index Stocks: Stocks that are part of major indices such as Nifty 50 or Sensex, like HDFC Bank.

• High-Volume Stocks: Stocks like ICICI Bank or Bharti Airtel, tend to be more liquid.

Knowing the examples is helpful, but how do you spot an illiquid stock before you accidentally invest in one? Let’s explore how to identify them.

How to Identify Illiquid Stocks?

Identifying illiquid stocks involves recognizing certain signs that set them apart from liquid ones. Here’s what to look for:

1. Low Trading Volume

Illiquid stocks usually have very few shares traded daily. This low activity can make it harder to buy or sell without affecting the price.

2. Wide Bid-Ask Spread

The gap between the bid price (what buyers are willing to pay) and the ask price (what sellers want) is often wider for illiquid stocks. This happens because there’s less demand and supply in the market.

3. Small Market Capitalisation

Stocks of smaller companies, often called small-cap stocks, tend to be less liquid due to lower visibility and limited market interest.

4. Lack of Institutional Participation

Large investors like mutual funds and banks usually avoid illiquid stocks because it’s difficult to trade large quantities without influencing the price.

5. Infrequent Trading

Illiquid stocks may go days or even weeks without any trades. This can be spotted by checking the stock’s historical trading patterns.

6. Frequent Lower Circuit Hits

Stocks that regularly hit their lower circuit limit (the lowest price they’re allowed to trade at in a session) may signal low demand and excess supply, a common sign of illiquidity.

7. Limited Market Depth

Market depth refers to the number of buy and sell orders available at different prices. Illiquid stocks tend to have fewer orders lined up, showing lower interest from traders.

Now that you know how to identify illiquid stocks, it’s important to weigh the risks before investing your money.

Risks of Exploring Illiquid Stocks

Illiquid stocks come with certain challenges that make them behave differently from more actively traded ones. Here are the risks to keep in mind:

1. Unpredictable Price Swings

With low trading activity, even small buy or sell orders can cause these stocks highly volatile.

2. Limited Information and Transparency

These stocks often lack detailed financial disclosures and market coverage, making assessing the company’s true performance harder.

3. Low Institutional Interest

Large investors, like mutual funds and banks, usually avoid illiquid stocks because of the difficulty in trading large volumes without affecting the price.

4. Potential Regulatory Actions

Exchanges regularly review stocks under SEBI guidelines. Illiquid stocks that stay inactive for too long may face penalties, trading restrictions, or even delisting.

Alright, you understand the risks. Now, let’s talk about how to actually buy them and navigate the risks wisely.

How to Buy Illiquid Stocks?

Buying illiquid stocks can be tricky because of low trading activity and wide bid-ask spreads. Here is how you can navigate the process more smoothly:

1. Control Your Purchase Price

Use a limit order to set the maximum price you’re willing to pay. This prevents overpaying due to sudden price swings, unlike market orders that may execute at unfavorable rates.

2. Prepare for Delays

Illiquid stocks don’t trade often, so your order may take time to complete, sometimes days or weeks.

3. Pay Attention to Price Gaps

Check the difference between the bid (buy) and ask (sell) prices. Placing your order slightly above the last traded price or just below the ask price can improve your chances.

4. Split Large Orders 

Break your purchase into smaller parts to avoid pushing up the stock price or attracting unwanted attention.

5. Understand the Stock

Research the company’s financial health, recent performance, and market behavior to ensure you’re comfortable with the stock.

Conclusion

After exploring the definition, examples, how to buy them, and risks like low trading volumes, price swings, and difficulty buying or selling, it’s clear that dealing with these stocks requires a clear strategy, patience, and careful analysis to navigate the complexities easily.

However, platforms like Precize simplify the process by facilitating access to shares of leading private companies, allowing investors to buy and sell unlisted shares and pre-IPO shares. It also supports the smooth liquidation of these shares, making the experience more efficient. 

Reserve your access with Precize today and diversify your portfolio seamlessly!

Disclaimer

The information provided in this blog is for educational and informational purposes only. It does not constitute financial advice or a recommendation to engage with any specific stocks, including illiquid ones. Stock markets carry risks, and illiquid stocks can be particularly unpredictable due to low trading volume and price fluctuations. Always conduct your own research or consult a qualified financial advisor before making any financial decisions.