Today we’re going to take a look at a question that is related to penny stocks.
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Here’s today’s question: How to sell penny stock we bought? It is hard because penny stock is unliquid.
There’s an issue when it comes to less liquid stocks. And penny stocks a lot of times are less liquid. My typical approach and advice to you is to stay under 20% of the daily trading volume.
That should keep you a little bit more in the clear. You might wonder what do I mean by this and how do we go about calculating this.
How many shares to trade – the Best approach
Let’s take a look at CDAY. It’s not necessarily a penny stock, but you can see it trades a lot less shares than Microsoft, for example.
When it comes to Microsoft, I can tell by the volume where it’s traded today about 22.3 million shares. Sometimes it trades around 30 million shares.
You can also see an average. There’s an indicator, and you add a moving average, and we can add a simple moving average to the volume.
Change it to a 20-day moving average. Why do I do 20-day? Well, because there’re 20 trading days in a month excluding weekends and those kinds of things. If you look at the average, the average is around 27 million shares in the last 30 days or so.
This is just an example so that you can have a better understanding.
Now, we are back to CDAY.
We’re looking at our average of about 600K-700K shares.
For you to stay under the radar, you want to do 20% of that, at most, depending on your account size. For some of you, if you’re trading more expensive stock, you might not be able to do this because it’s already at $50 a share.
Scenario with 600K on average, and we multiply that times 20%, we get 120K shares. It means that I probably don’t want to do more than 120K shares on that. That’s because for me to get out of that, it may take multiple days. Because already you’re one-fifth of the trading volume for any single day. It may take you multiple days to get out of that without moving the stock too much.
The next step is to multiply this (120K shares) times $50 a share. And you’re looking at a six million dollar account. Now that may sound huge, and it is enormous to the normal regular person. But if you’re a hedge fund and if you have a lot of my extra money sitting around and you wanted to buy this stock, six million dollars is not a lot of money to move the stock.
And if you’re taking six million dollars, you probably would move this stock quite a bit. And that’s 20% already of the average daily volume.
Even to get into it, you’d probably push it a little bit higher. Once you try to get out of it, you probably push it a little bit lower. That’s because you’re one-fifth of the trading volume. That’ll keep you out of major trouble. But if you want to be under the radar and be a smaller fish is better in that case.
Getting into smaller stocks
This is where the problem lies. When we start getting into smaller and smaller stocks.
For this example, we’ll use stocks that are a couple of dollars a share. You can see this stock, which trades on 28,000 shares on average on a day-to-day basis.
This stock is around $3 a share, and let’s say you were interested in getting into this. I don’t know what this stock exactly does.
But the whole point behind this is to move this stock. If it only trades 28,000 shares on average times $3, you see where we’re going with this. You only need about $84,000 to move that stock and to take all the daily volume from this stock.
Imagine that with under $100,000, you could move the stock in a big way. That’s why you need to be careful. If you’re looking at a 28,000 share, you want to multiply that times 20%.
And you get to the conclusion that you don’t want to trade more than about 5,600 shares. That is 20% of 28,000 shares. But if you’re going to stay under the radar, trading 5000 shares or less should keep you out of some trouble. Even then, that would be around $17,000.
Remember, in that case; you’re still a big fish in this case in this stock. And that’s the problem when you’re trading penny stocks. Anything that’s $3-$5 because any one of these stocks you can move it.
Looking at IPDN
This stock was at around $1.56 at one point, and it only traded about 19K shares.
In this case, you need $28,500 to move this stock.
19K X $1.5 = $28,000
You need to be very careful when dealing with this because a large amount of capital could move this. And you could get stuck in a position not being able to get out.
Let’s say that we want to be safe:
19K X 10% of the daily volume = 1900 shares
1900 shares X $1.5 = $2850
You probably only spent $2850 on this stock at most. Because otherwise, if you start trading larger than that, you’re becoming a big fish. That means you can move the stock, and it may make it more difficult for you to get out of the stock.
Those are some things to consider about illiquid stocks and how much to trade when it comes to less liquid stocks. You always want to be under the radar.
One of the advantages of having less capital is because you’re able to be under the radar buying a few shares here and there.
I hope this makes more sense and gives you some insight into how large you should be trading, especially more regarding penny stocks.