Buy on the Ask for Low Volume/Illiquid Stocks

When it comes to timing an entry into a stock, people always want to find the best price possible. This is pretty obvious, considering that the point of buying a stock is to make the most money possible. Most people assume that the best price possible is the lowest price, however, this is not always true. If a stock is very liquid, and trading on high volume, you will want to enter at the lowest price possible once your indicators tell you to buy. With an illiquid, low volume stock, I take a different approach. I try to buy the stock at a price that will support the overall health of the stock and price action.

Let me use an example to demonstrate:

This is the Level 2 screen for a stock called MYEC on Thursday, May 1, 2014.

Important things to note are:

The last trade was at $0.031/share. There are 260,000 shares on the bid at $0.0309/share and 10,000 shares on the ask at $0.031/share. It’s also important to note that VFIN is a known dilutor and is probably selling much more than 10,000 shares. He is only obligated to sell 10,000 shares at $0.031/share, but he can sell as many as he wants.

So, let’s look at the first bid order of 25,000 shares at .0309. While it would be nice to get cheaper shares, this isn’t always the best move. A stock needs upward momentum in order for it to run. If the 25,000 share order at $0.0309 gets filled, the momentum has shifted downwards. The bidder now bought a stock that is moving downwards. Assuming the price stays at $0.0309/share, the bidder has a $0 net profit. Additionally, a level of bid support has disappeared. There are still 10,000 shares on the ask at $0.031, but now there are only 235,000 shares on the bid at $0.0309.This means the stock can now go down much faster because there are less shares being demanded on the bid. So, let’s do a quick recap. By buying shares at $0.0309 the buyer has shifted momentum downwards and lowered bid support, making it easier for the stock to drop. So, how much did he save by buying on the bid instead of the ask? $2.50! For a mere $2.50, this buyer has damaged the price action of the stock.

Now, let’s look at how things would have played out if they bought at the ask. Take those same 25,000 shares and purchase them on the ask at $0.031/share. Let’s assume that VFIN is only selling 10,000 shares, although, realistically, he probably will sell much more. If this buyer bought on the ask, they would take out VFIN’s 10,000 shares. This would mean that there are now 15,000 shares on the bid at $0.031, 235,000 shares on the bid at $0.0309, and 109,000 shares on the ask at $0.032. The buyer purchased shares and helped move the price up. This setup is much better for supporting a run. Sure, the seller only got 10,000 of their 25,000 shares, but now if someone sells the remaining shares (15,000) on the bid, the price is just going sideways and not down. Additionally, other investors now see stronger bid support and a chance to break the daily high of $0.032. Now, if VFIN had more than 10,000 shares to sell, the buyer would get their 25,000 share order filled on the ask while helping chip away at the large order. Once again, this helps support upward momentum. Other investors may see people chipping away at the ask and decide to join in because a run seems possible. Additionally, there are still 235,000 shares on the bid at $0.0309 so if the stock starts turning, there is enough support to get out before taking a major loss.

Don’t get me wrong, I do not always buy shares on the ask, but for the most part I do. First of all, it almost guarantees that you get shares. Secondly, you are helping support and upward momentum which is a large reason you got into the stock in the first place. All that being said, this strategy needs to be evaluated on a case-by-case basis. It is important to think about the overall trend of the stock. If it is going down, there is no reason to buy on the ask because you probably do not have the power to trigger a reversal. Your order size will also play an important role here. In this case, the bidder who wants 25,000 shares at $0.0309 is only saving $2.50 by not buying on the ask, whereas the 235,000 share bidder is saving $23.50. Depending on the size of your order, as well as your exit strategy, you will want to think about how much money you will be saving compare to to what you are doing to the stock’s price action. For example, if 235,000 shares get filled on the bid, the bidder saved $23.50, however, the next level of bid support is at $0.0287. People may see a big sell order get filled for 235,000 shares and begin to think that sellers are in charge. This could cause the price to drop further. If someone then sells at the $0.0287 bid, the 235,000 share bidder’s shares are now worth $517 less than when they bought them. This means that this bidder lost $517 to try to save $23.50.

One last thing to keep in mind is your exit strategy. If you are buying shares to scalp intraday, a savings of $23.50 may be more significant than if you are in it for the long haul. However, if you are going long on the stock and plan to hold for awhile, those savings may be insignificant. That being said, if you are going long, you may not care about the intraday price action so it may be worth it to save $23.50.

As you can see, there are a lot of things to take into account when placing an order on a low volume stock. There are no strict rules. The point of this article is just to get you thinking about the ramifications of your orders. Cheaper is not always better. Try to place orders that allow you to get a good price on shares while supporting the price action of a stock. The more traders that do this, the better chances stocks can run.