Some stock experts recommend, to assure liquidity, that we not buy stocks trading below a daily average of 300,000 shares. But this recommendation seems meaningless to me, unless the number of shares one purchases is also specified. Is liquidity reasonably assured, for example, if you buy 20,000 shares, or only if you buy no more than 100 shares? It seems to me that some ratio would be more appropriate, but just what that ratio is, I would like to know. (May 14, 2001)
The primary consideration on liquidity is the ability to get out of a position if things start to fall. If volume is less than 100,000 shares on a 50 day average, there could be a problem if some bad news hits and you hold the stock. There may be no buyers no matter what size block of stock you are looking to unload. It is true that a smaller position would usually be easier to sell than a larger position in any stock whether it was liquid or not. The problem with illiquid stocks is, as stated, there simply may be no buyers if bad news hits. As for any position whether options or stock, we don't want to be 10% or more of the market.
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