In my investment strategy, I generally focus on small-to-medium sized companies. In a lot of cases, they don’t trade very frequently. That works fine if I’m willing to be patient, but I also take a risk that the price could move while I’m “being patient.” While my order is in, sitting at a relatively low bid, the stock could continue to trade with no one willing to sell to me at the lower price.

When I look to trade a thinly traded stock, I use a limit price. If I didn’t use a limit price, I could end up moving the market and paying more (or earning less) than I had expected. Let’s see an example. Suppose stock XYZ last traded at $5.00. I want to buy $75,000 at $5.00, so I enter an order to buy 15,000 shares. The first 100 shares are bought at the offer price, probably $5.00. But there may have been only one person willing to sell 100 shares at $5.00. The next person might be willing to sell 300 shares at $5.02, then 700 shares at $5.05, then 200 at $5.06, then 1500 at $5.07 and so on. Looking at Level 2 data for market depth would show it like this:

Bid Size Bid Price Ask Price Ask Size
 100  $4.99  $5.00 100
 300 $4.95  $5.02  300
 200  $4.94  $5.05  700
 500 $4.93  $5.06  200
 700  $4.91  $5.07  1500
 2000  $4.90  $5.09  300
 $5.10  600
 $5.15  3000

From this market depth data, we can see a couple things. First, there aren’t many shares available for sale or for purchase. Right now, there is only a bid for 3800 shares total. If someone wanted to sell 3800 shares, they would be able to sell some at $4.99, but most at $4.90. The average price they would get is $4.9142 for a total of $18,674. Second, we can’t see all the ask, but there’s not 15,000 shares available for a reasonable price. If I entered a market order for 15,000 shares (without specifying a price), I would pay $5.00 for some, then each price on the grid above, including $5.15 and likely more. My order would push the price way up. I would also spend far more than $75,000 to get the shares.

So I almost always enter a limit price. In the example above, I may decide that I’m willing to pay up to $5.10, but not more. (I would need to recalculate how many shares I could buy with $75,000 at $5.10 each.) In this example, I could buy 3700 shares, but then my order would sit in the market until someone else is willing to sell for $5.10 (or less). The market depth would look like this.

Bid Size Bid Price Ask Price Ask Size
 11000  $5.10  $5.15 3000
 100  $4.99  $5.20 1000
 300 $4.95  $5.35  300
 200  $4.94  $5.50  7000
 500 $4.93  $5.95  200
 700  $4.91  $6.00  10000
 2000  $4.90

What happens, though, if no one else is willing to sell for so little? This happened to me recently with New Flyer (NFI). It fell below $7.00 and I felt it was worth buying. By the time I entered my order, the price had already moved above $7.00 and kept climbing. My order never filled and I got zero units. More recently, I’m trying to buy a thinly traded stock that’s more like the example above: I’ve gotten 300 of the 3500 that I want, but the price has risen about 2%. It doesn’t seem like much, but that’s 1/3rd of the dividend yield for a year. It’s also far more than I’m willing to pay in commission. It’s also about 1/5th of the capital gain I would hope to earn in a year. On the other hand, if it keeps rising, I won’t earn any dividend or capital gain.

It’s a confusing situation, watching a stock’s price rise and wonder if I missed out, or if I dodged a bullet by not overpaying. But I remind myself that another deal will come around, either in this stock (if the price falls back) or in another stock. It will just take patience and effort to find it.

The one that got away

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