Ask Colin

How do you manage orders in low volume stocks?

The detailed question was:

I noticed on your Stock Journal for Data#3 (members website) you mention that buying it ‘required some patience in waiting for sufficient volume’. Since buying at a judicious time can mean a big saving over buying at a not so judicious time, I’d be interested in knowing how you go about placing your order – the what and the when.   


It is difficult to give rules or guidelines that cover every situation.


In general terms though, where a stock is large and very liquid there is no real problem. I decide the price at which I want to bid or offer and put my order in the market. The key now is to be patient, which means not sitting there watching the screen (it is as addictive as a poker machine). I usually check in two or three hours’ time. If I have not got a fill, I then decide to continue waiting or to move my order. I will in general be far more patient buying than selling because if a stop has been hit, I am wrong about my investment.


For more thinly traded stocks, I may be a large investor relative to the depth screen and probably the usual daily volume. I will again put my order in the market. For a sell where my stop has been hit, I will be more anxious to get my order away and look to find the volume with less patience than for a buy order. For a buy order, every situation is different. The biggest danger lies in impatience. However, if I have not got a fill after a couple of days, I will cautiously move my order.


What I did with Data#3 was to place my order at 69.5c just after the open and left it there most of the day. Late in the day a sell order appeared at 70.5c in enough volume for me to get my whole order away, so I hit the offer. I had hoped to buy at 70c when I did my position size calculation.


The attractiveness of accepting a price that would fill my whole order is that it simplifies the paperwork. If I get fills in dribs and drabs over maybe a week, the number of daily transactions make a lot more work. So, I might get 90% of my order done at say 70.5c and then hit the offer for the balance at 72c. That means one daily transaction to record. If you don’t mind the paperwork, then just wait for more at the price you are prepared to pay. Basically, I consider what the average price will be. Where the rump is small, it does not move the average price paid/received much.


What I described for Data#3 was for my SMSF account, which you see on the website. I also have another account of similar size that mirrors and is outside the super system. For it, I got a reasonable chunk away at 70.5c, but waited until the next day to get a fill at that price on the balance (more than half the order). As you can see it is a trade-off between paperwork and price.


Finally, what I think is a very important issue: finessing entry and exit is far less important for investors than for short term traders. Traders are exploiting price change often over short time periods, so that entry and exit prices are very important. However, investors are buying part ownership of a business to secure an income stream and capital growth over time from reinvestment of retained earnings, which means finessing entry and exit prices is a lower order issue.