Volume Friend or Foe?

26 September 2008

Many small and mid cap companies complain about how they have low average daily trading volumes and therefore have difficulties marketing their company to large institutional investors.  Institutional investors often like high trading volumes (otherwise known as good liquidity) so that they can easily get in and out of a particular stock.

During the recent financial crisis I heard a few institutional shareholders mention that during the most volatile times of the past two weeks they focused on “liquidating their most liquid holdings”.  In other words, if it was easy to get out of a stock then they got out.

While a low average daily trading volume can sometimes be frustrating for companies as they try to market their business to larger institutional shareholders, the past week shows that sometimes low trading volumes can be a blessing and protect company valuation.

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