Beware When Trading Unknown And Unpopular Shares
The question of which shares to trade is often pertinent amongst new traders. While there are a few obvious choices, notably in the FTSE100, there are investments to be found elsewhere in the markets for well-researched traders looking to find a profit. When searching for trading opportunities in niche corners of the financial markets, it's nevertheless important to remain wary of the nature of the shares you're looking at. Those shares that are uncommon or unpopular amongst other investors should be handled with caution, and there are a variety of potential pitfalls when getting involved in smaller, more obscure share markets.
When you're trading in unpopular shares, which usually belong to smaller, more financially volatile companies, the first problem that traders should be wary of is liquidity in the market. Liquidity is the rate at which an investment can be sold for cash, and is represented by the duration between order and execution through your trading platform. If there are low trading volumes in a market, you will have to wait longer for your order to be fulfilled - the market will be less liquid, and therefore more susceptible to slippage over the duration of each order. For any trader, knowing you can sell your investment is as important as knowing you can buy it, and in low liquidity markets you run a higher risk of being unable to shift your position at the price you desire.
Markets that are shaped by millions of different traders and shareholder interactions each day tend to be a better gauge of market price, and tend to provide the most transparent window into what's going on for traders. If there's a serious underlying problem at Shell, the markets will know about it - it will be obvious from share price data, given that decisions as to how events are to be interpreted are factored in from millions of independent traders. In smaller markets, this is less potent an effect, and for obscure shares having any guarantee of market transparency is difficult. This means that trends may be less reliable, and trading signals not always as accurate when investing in uncommon, lightly traded securities.
Another crucial factor any investor wants to ensure, particularly those with a long-term interest, is corporate governance - that is, how effectively the board are being held to account by the shareholders. In larger, more commonly traded companies this is assured, again because of the diversity of ownership and voting rights that make for a more stable body to oversee the performance and wider strategy of the board of directors. The smaller the company, the less this degree of corporate governance can be assured, and as a result investments in shares of this type do not enjoy the same checks and balances against corporate incompetence or malfeasance.
Look for some indication of trading volume before deciding which shares to invest in. Those shares that are not frequently traded are probably best avoided, in favour of the many opportunities that remain in the wider mainstream markets. As an individual trader of limited resources, it's important to take shelter in the impact of larger investors, who tend to trade most heavily in large corporate securities.