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The Do’s and Don’ts of Trading Micro- and Nano-Cap Stocks

If either the recent news of an SEC rule change affecting over-the-counter (OTC) stocks, or prior coverage of P10 Holdings (PIOE) in this very issue, have piqued your interest in trading micro- or nano-cap stocks, you should be aware that there are fundamental “market mechanics” that should change the way you trade that type of security.

With a stock like Tesla (TSLA) you can confidently call your broker or go on your trading platform of choice and place a market order for hundreds or thousands of shares without having to worry about how your individual order could affect the market.

With low-volume securities, a moderately sized $10,000 or $20,000 order could swing the price 20%, 30%, or more!

So in the interest of facilitating trading in smaller and less liquid names, we’ve compiled some useful tips for managing order size and understanding the markets to a greater degree.

We highly recommend familiarizing yourself with the security’s price and volume behavior and taking some time to view “Level 2” quotes like those featured on the table below.


These quotes are courtesy of, and are available for free to the trading public. “Level 2” quotes for listed securities may be available through your broker, but you might have to request them.

A “Level 2” quote shows the depth of the market at a given time. The security pictured above trades, on average, about 60,000 shares per day. Which means, at the lowest ask price of 0.784 a full day’s trading volume may be only $45,000 or so.

This can make buying and selling large positions more time consuming than if you were to invest a similar amount of money in a more liquid stock.

As you can see in the table above, the best “ask” is currently 0.784, and there are 1,900 shares available for purchase at that price. If a buyer put in an order for 2,000 shares with a limit price of 0.79, they would receive a partial fill and the remainder of the order (100) shares would stay open until another seller came in to complete the order at that limit price.

Avoid Market Orders
As you can see in the table, a market order for 20,000 shares would pay over $1 for some of their shares. This is the most important rule. Never use a market order. If you want to immediately buy or sell shares, place your order as a limit order at the bid (if you’re a seller) or ask (if you’re a buyer).

A buyer that entered a market order for 2,000 shares instead of a limit order would fill the first 1,900 shares at the best ask (0.784) and then fill their subsequent 100 shares at the next best available price, which is 0.88. It is possible that there are actually more shares than reflected at the best ask price, but you should not assume that is the case.

Consider Using Good-‘til-Canceled Orders
If you’d like to buy more shares than are readily available at the best ask, consider entering your limit order “good-‘til-canceled,” which would leave the order open for up to 60 days or until filled. This can allow you to enter a larger order than you might expect to fill in a day and may be easier than manually entering multiple orders. Be aware other players in the marketplace will be able to see your open order if it’s for a large number of shares and you could attract short-term sellers looking to unload shares (or cause sellers to hold onto shares, thinking that you know something they don’t).

Trade in Chunks
As an alternative to using large, one-time orders that may execute over the course of several days, you can achieve similar results using smaller orders and a little more effort. This will be very dependent on the particular security, but for a security that regularly features bids and asks in 1,000+ shares, consider using multiple limit orders to buy or sell either throughout the day or over multiple days.

When you trade illiquid stocks this way it requires more transactions and effort but also allows you to execute trades as the market allows them. For instance, if a seller listed 10,000 shares at a price of 0.795 in the above security, you could take that opportunity to accumulate more shares at a slightly higher price.

A useful rule of thumb is to try not to put yourself in a position where you’re trading more than 25% of a security’s average daily volume in a single day. For the security above (60,000 average daily volume) you would want to limit yourself to less than 15,000 shares traded throughout the day. There are days during which illiquid securities could trade significantly more (or less) shares than average, so the Level 2 quote is your best guide for a trade at that moment, but the average daily volume is useful as a general rule.

Avoid Stop Orders
Stop orders turn into market orders when triggered, and a market order to sell is never a good idea in illiquid stocks. In the table above you can see 1,700 shares bid at 0.733, and 6,100 shares bid at 0.7329. The next best price is 0.70, and then 0.605. If we placed a hypothetical market order to sell 10,000 shares, we would sell the first 7,800 for about 0.733, the next 1,000 for 0.70 and then the last 1,200 for only 0.60.

Having a mental stop in place is a good practice but remember that selling a large position can take time.

Only Invest Money that Can Remain Illiquid
If you are investing in illiquid securities, it’s important to remember that a stock that’s illiquid to buy is just as illiquid to sell. Never invest money that you may need to have available at a moment’s notice. A $50,000 investment into our hypothetical stock could realistically take anywhere from one to five days to fully accumulate.

You should plan on spending the same amount of time unwinding the position as a seller and err on the longer side.

Consider Working with Your Broker to Execute the Trade
Having access to Level 2 quotes is sufficient to execute a trade in illiquid securities for investors that are familiar with some aspects of market mechanics. And if the information in this article is old news to you, you may be one of them.

If, however, you’re less familiar with this information or trading low-volume stocks in general, you may want to work with your broker on implementing a trade, especially if you plan on making a large investment.

All of the guidance above applies to both buyers and sellers of illiquid securities.

When trading illiquid securities, you must remain patient. There is no way for you to add liquidity that isn’t there, no matter how urgently you may need to, and trying to push through buys or sells that the market is unwilling to accommodate will just result in you paying too much or selling for too little.

But if you have patience in entering and executing orders at a pace that the market allows (and you never use a market order) trading OTC stocks can open you up to a world of smaller companies you might never have found otherwise.

Have you ever traded low-volume micro- and nano-cap stocks? What have you learned from the experience?