I recently received this really good question from a Quant Value newsletter subscriber about how to trade small illiquid companies.
It is not always simple to implement your suggestions because of the liquidity of some shares (for buying as well as for selling).
Can you please give me some advice or suggestions about orders and liquidity?
This is a good question as some of the companies we have recommended in the newsletter are quite illiquid, and this even though we only look for companies that have traded at least €100,000 per day over the last 20 to 30 trading days.
The thing is, trading volume changes a lot from day to day.
Here my best ideas for how you can get the best buy and sell prices.
Always use a limit order
I recommend that you always use a limit order when buying or selling.
This will make sure that your order does not get executed at a price substantially different to the current market price, even if the number of shares traded is low.
What is a limit order?
As the name suggests, with a limit order, you tell your broker to buy or sell the share at a certain maximum or minimum price that you determine. This means the order will only be executed if the price is the same or better than the limit you have set.
For example, if you enter a buy limit order with a price of €50 but the current market is €60, the order will not be executed unless the price drops to or below €50.
You may need to pay a slightly higher commission when you place a limit order, but it is worth it.
Remember with a limit order your order will not get executed if the price you set is not reached. This means if you gave your broker a sell limit order at €40 and the current price is €30, your order will not be executed unless the share price increases to or above €40.
Click here to find companies that EXACTLY fit your investment strategy
What if it's a different currency
Check with your broker but usually your limit order has to be in the currency of the market where you are buying or selling.
For example, if you live in Europe and your brokerage account is in Euro but you are buying shares of a company on the London Stock Exchange your limit order has to be in British Pounds (GBP) or Swiss Francs (CHF) if you are buying and selling on the Swiss Stock Market.
Practical order example
Let’s work through a practical example.
You want to buy 8 000 shares in XYZ Group and your online broker shows you the following information:
- Last trade price €1.14 (+0.76% from yesterday)
- Volume traded so far today: 46 764 shares
- Bid (buy) price: €1.14
- Bid (buy) volume wanted: 1 000
- Offer (sell) price: €1.16
- Offer (sell) volume offered: 9 571
(Keep in mind that this information is in most cases 15 minutes old so it may have changed)
What can you learn from this?
You can see if you offer €1.16 (1.75% more than the last trade price) you can get your order of 8 000 executed as there is someone in the market that wants to sell 9 571 shares at that price.
This is good to know because it’s important to get your order executed in one day as in most cases your broker will only charge you brokerage once (remember to ask your broker) even if the total order is executed in a few transactions on the same day.
If €1.16 (+1.75%) is more than you want to pay to get your order executed immediately (I am usually willing to pay about 0.75% more) you can enter your buy limit order at €1.14 or even €1.15 (+0.88%) to see what happens.
How long to make your order valid
I suggest you make your orders valid for a month. That way you can wait for the order to be executed as well as change the limit price if it does not get executed.
Remember you can cancel your order at any time.
Click here to find companies that EXACTLY fit your investment strategy
How to keep dealing costs low
If part of your limit order has been executed – for example if 100 shares of an order of 1000 shares have been bought or sold – change your limit so that the whole order is executed.
This is to avoid that your order gets executed over a few days, in which case you would have to pay the minimum broker costs every day.
If 80% of your order has been executed and the price has moved substantially away from your limit, I suggest that you cancel the rest of my order and live with a smaller position.
When selling, this is different as you usually want to exit the investment completely. So if 80% of your sell order has been executed and the price has not fallen too much, I suggest that you sell the remaining 20% at the lower price rather than be left with a small investment in your portfolio.
If the share price has fallen to a lot lower than your limit you must compare the lower price with the minimum broker costs. If the broker costs are small compared to the amount of the 20% position remaining, I recommend that you not sell but watch the price closely as you may get a better price if you sell over the next few days.
What if nothing happens?
If nothing happens on the day you entered your limit order I suggest you wait to see what happens in the following few days.
If the price keeps going up I suggest you change your limit order to make sure your order gets executed (€1.16 or higher in this example) as there is nothing worse than running behind a rising share price if you want to buy, or a falling share price if you want to sell.
Bonus Tip – How to sell if the price is far away from your limit
Here is a great tip I got from a broker (thanks Vaughan) on how you can you sell an position if the buy (bid) price is a lot lower than your limit.
Sell a small number of shares at the low bid price - shares worth about €100 for example. This large fall in price will make other buyers aware of the company and result in more buyers and a higher bid price.
Even though you may have sold a few shares at a very low price, the overall price you will get for the remaining shares will more than make up for this.
“Fill or Kill” and “All or None” orders
It is also possible to improve your buy and sell limit orders. Do this with Fill or Kill (FOK) or All or None (AON) orders.
When you place a FOK limit order, it will either be executed in full or cancelled (executed in full here means buying or selling the exact number of shares you ordered).
On the other hand, when you use an AON limit order, it will only be executed if your broker can buy or sell the exact number of shares you ordered. And if it cannot be filled, it will not be cancelled (as is the case with a FOK order), but will be held for later execution as long as the order is valid.
The AON is a very good type of order to use when you are buying or selling illiquid shares as it helps you avoid high dealing costs. It will avoid multiple transactions of small amounts that can be very expensive in terms of brokerage.
Unfortunately this type of order is not available from all brokers or on all stock exchanges.
Frequently Asked Questions (FAQs) about Trading Small Illiquid Companies
Why should I always use a limit order when trading small illiquid companies?
Using a limit order ensures that your trade is executed at a specific price you set, protecting you from significant price changes in a low-volume market. This way, you can avoid buying or selling at prices substantially different from your intended target, ensuring more control over your trades.
What exactly is a limit order and how does it work?
A limit order allows you to set a maximum price you're willing to pay when buying or a minimum price you're willing to accept when selling. The order will only be executed if the market price meets your limit.
For example, if you set a buy limit order at €50 and the current price is €60, your order will only execute if the price drops to €50 or below.
How do I handle currency differences when placing limit orders?
When trading on foreign markets, your limit order must be placed in the currency of that market. For example, if you are trading on the London Stock Exchange, your order should be in British Pounds (GBP), or in Swiss Francs (CHF) if trading on the Swiss Stock Market.
Check with your broker to confirm how to handle currency conversions.
What’s the best strategy for placing a limit order to ensure it gets executed?
To increase the likelihood of execution, you can set your limit order slightly above the current bid price when buying or below the current offer price when selling. For example, if the bid price is €1.14 and you want to buy, you might set your limit at €1.15 or €1.16 to ensure it gets executed more quickly.
How can I minimize brokerage costs when trading illiquid shares?
If part of your limit order is executed, adjust the remaining order to get the rest executed on the same day, avoiding multiple brokerage charges. If a significant portion of your order is filled and the price moves away from your limit, consider cancelling the remaining order or accepting a smaller position.
For selling, if the price drops too much, compare it with the minimum broker costs and decide if holding the shares longer might be beneficial.
What should I do if my limit order doesn’t get executed immediately?
If your limit order isn't executed on the first day, monitor the price movements over the next few days. Adjust your limit order if necessary to ensure execution.
For buying, raise your limit if the price is rising; for selling, lower your limit if the price is falling to avoid missing the market trend.
How can I improve the chances of executing my entire order when trading illiquid stocks?
Use "Fill or Kill" (FOK) or "All or None" (AON) orders. A FOK order ensures that the order is either completely executed immediately or cancelled.
An AON order ensures that the entire order is executed but can remain open until it’s fully filled. These types of orders help avoid multiple partial transactions, which can be costly in terms of brokerage fees.
However, not all brokers or exchanges support these order types, so check with your broker first.
I hope you have found the advice helpful, please let me know if I have forgotten something or if there is something you have not understood, I will be happy to explain it to you.
PS If you have found this information useful take a look at our stock screener and investment newsletter.
They costs less than an inexpensive lunch for two, to find out simply click here: Join now
Click here to find companies that EXACTLY fit your investment strategy
