24 Oct, 2025
5 mins read
Investing in the stock market involves balancing opportunity and risk. While high-volume stocks are easier to buy and sell, some shares face challenges in trading due to low market activity. These are known as illiquid stocks. Understanding what they are, their risks, and how to handle them is essential for both beginners and experienced investors.
Illiquid stocks are shares that have low trading volume, meaning they are not frequently bought or sold in the market. In contrast, liquid shares such as large-cap or well-known companies have high trading activity, allowing investors to enter or exit positions easily.
Illiquidity in stocks often results in wider bid-ask spreads, higher price volatility during trades, and difficulty in converting holdings into cash quickly. While liquid shares offer flexibility, illiquid stocks may carry hidden risks and require careful consideration before investment.
Investors can identify illiquid shares based on certain key characteristics:
Low Daily Trading Volume: These stocks may trade only a few hundred or thousand shares per day.
High Bid-Ask Spread: The difference between buying and selling prices is usually higher, increasing transaction costs.
Price Volatility: Even small orders can cause significant price movements.
Limited Market Depth: Few buyers and sellers are available, which can result in delayed executions.
Smaller Market Capitalization: Many illiquid stocks belong to small-cap or micro-cap companies.
Several factors contribute to a stock being illiquid:
Low Public Float: Few shares are available for trading due to high promoter holdings.
Limited Investor Awareness: Small or lesser-known companies may not attract active traders.
Lack of Analyst Coverage: Stocks not followed by analysts or research reports see lower investor interest.
Market Sentiment: Negative news or declining performance can discourage trading activity.
Understanding these reasons helps investors assess the potential risks associated with trading such shares.
In India, illiquid shares are often found in micro-cap or small-cap segments. Companies with a small number of publicly traded shares and limited institutional participation usually fall under this category. For instance:
Small private companies listed on the BSE SME platform
Niche industries with limited exposure
Newly listed IPOs with low subscription rates
Investors should research historical trading volumes and recent price trends before considering these stocks.
Investing in illiquid shares carries unique risks that are less common in large-cap, liquid stocks:
Difficulty in Selling: Investors may struggle to exit positions, especially during market downturns.
Price Manipulation: Low-volume stocks are more susceptible to price swings caused by a single large trade.
High Transaction Costs: Wider bid-ask spreads increase costs for both buying and selling.
Potential Loss of Capital: Selling under pressure can result in significant losses if there is insufficient demand.
Limited Information: Smaller companies may provide fewer financial disclosures, making analysis challenging.
Being aware of these risks allows investors to develop strategies to mitigate them.
If you decide to trade illiquid stocks, consider these practical strategies:
Limit Order Placement: Avoid market orders. Use limit orders to control buying and selling prices.
Smaller Trade Sizes: Break large trades into smaller portions to prevent drastic price changes.
Patience: Expect slower executions and be ready to hold positions longer.
Research: Analyze fundamentals, news flow, and historical trading activity to understand risk.
By taking these precautions, investors can manage risks while attempting to benefit from potential growth in illiquid shares.
Before committing capital, there are several ways to identify illiquid shares:
Trading Volume Metrics: Check average daily trading volume over the past months.
Bid-Ask Spread Analysis: Wider spreads are a clear indicator of low liquidity.
Market Capitalization Review: Micro-cap and some small-cap stocks tend to be less liquid.
Exchange Filters: Use BSE and NSE stock filters to screen for low-volume stocks.
Professional Insights: Analyst reports and research platforms often highlight liquidity concerns.
Being proactive helps investors avoid unexpected difficulties when entering or exiting positions.
The concept of liquidity extends beyond stocks. Liquid assets include cash, government bonds, and frequently traded equities. Illiquid assets include private equity, real estate, or niche stocks.
Investors should maintain a balanced portfolio that mixes liquid and illiquid holdings to achieve flexibility while pursuing growth. Understanding the trade-off between liquidity and potential returns is crucial for strategic asset allocation.
The Securities and Exchange Board of India (SEBI) and stock exchanges actively monitor illiquid shares. Measures include:
Price Bands: To prevent extreme price fluctuations during low trading activity.
Enhanced Surveillance: Exchanges may track low-volume stocks closely to avoid manipulation.
Mandatory Disclosures: Companies with low liquidity are required to provide more transparency in reporting.
ASM and GSM Frameworks: Certain illiquid or volatile stocks may be placed under Additional Surveillance Measure (ASM) or Graded Surveillance Measure (GSM) to safeguard investor interests.
These regulations aim to reduce the risks associated with trading illiquid shares.
Illiquid stocks are an essential concept in stock market investing. While they can offer unique growth opportunities, they carry significant risks that investors must understand. Characteristics such as low trading volumes, high bid-ask spreads, and price volatility differentiate illiquid shares from liquid stocks.
By performing careful research, using limit orders, and understanding market mechanics, investors can navigate illiquid shares prudently. Balancing liquid and illiquid assets in a portfolio ensures flexibility, mitigates risk, and positions investors for long-term financial success.
Check for low average daily trading volume, wide bid-ask spreads, and limited market depth.
Yes, if the company grows, gains investor attention, or sees increased market participation.
They can offer high returns, but investors should be aware of high risk and potential difficulty in selling.
You may need to wait for a buyer, accept a lower price, or split your sale into smaller trades, potentially affecting returns.
Calculate your Net P&L after deducting all the charges like Tax, Brokerage, etc.
Find your required margin.
Calculate the average price you paid for a stock and determine your total cost.
Estimate your investment growth. Calculate potential returns on one-time investments.
Forecast your investment returns. Understand potential growth with regular contributions.
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