Should You Gamble on Less Active Stocks?
Similarly, retailer Costco (COST) trades only 2.4 million shares a day. Monthly sales data can move this stock a great deal in a short period of time because the shares are thinly traded compared to other large retailers. Costco's stock rose from $70 on March 16 to $78 on April 7, thanks to excitement about improved earnings. Does it matter that the large change in the number of shares it trades when it issues results tends to move its stock price more than might be the case with a widely traded competitor like Walmart (WMT)?
Is the argument that highly liquid stocks are more stable than those with fewer shares true? Probably, because the fundamentals of supply and demand rule trading as they do most economic transactions.
But this leaves the investor with a decision: Does he prefer the potential of sharp moves up or down that comes with a stock whose normal daily volume is modest? The risks involved are considerable, but so are the potential rewards.
Investors who would rather count on a stock's tendency to trade within a relatively small range should stick to the "most actives." These are usually large companies that also tend to pay dividends -- another source of steady returns. The most active list usually includes the largest banks, such as Bank of America (BAC), and multinationals like GE (GE), Microsoft (MSFT), and AT&T (T) -- stocks that are unlikely to be roller coasters.