Continuing on the topic of efficient management of one’s share portfolio (see prev. post https://srirakshafp.com/2013/08/20/managing-your-share-portfolio-efficiently/), how does one deal with illiquid shares in the portfolio? The “value” companies one invested in when they were a hot favourite with the market experts, and enjoyed decent trading volumes, and are now not only trading at a huge discount to the invested value, but also the trading volumes are so low or negligible that one finds it difficult to even offload them and recover whatever they can.
Firstly, one needs to know what is the definition of an illiquid stock, according to SEBI.
An illiquid stock is one which satisfies any one of the following conditions-
- The average daily trading volume in a quarter is less than 10000.
- The average daily number of trades is less than 50.
- The stock is classifies as illiquid on all the exchanges on which it is traded.
If one wants to liquidate/sell such stocks, there are two ways in which it can be done-
Periodic call auction –
Illiquid stocks can be traded through periodic call auctions conducted for such shares. These auctions are for one hour duration each, starting from 9.30 AM in the morning when the stock market opens till the closing time, out of which the first 45 minutes are allowed for order entry and the order matching, execution etc happens in the balance time. If your order does not get executed in one auction session, it gets cancelled and a fresh order has to be placed during the next auction. Hence investors have to continuously monitor till the trade gets executed.
Selling to companies buying such shares-
There are companies such as 3A capital services and Kajaria securities and finance which buy such shares. But one has to compromise on the selling price, which could be as low as 40 – 50 % of the last traded price.
Though the above two methods can be used to sell one’s illiquid stocks, the negative of doing so is that one will have to sell at a price much lower than the current valuation, since there is no market for such shares. So, it is advisable to carefully analyze and study such stocks, and opt to sell out only if the company is really not doing well with little or no chance of revival. If the market conditions or the particular sector not doing well are reasons for the stock not being traded much, but there isn’t anything particularly wrong with the company’s fundamentals, there are always chances of renewed interest in these shares in future.