Why The Volume of a Penny Stock or Micro Cap Company is Important

When investing in penny stocks one would be prudent to find out what the average volume of the stock is. The average volume of the stock is how many shares of that company is trading on average over 30 or 90 day period.  Most finance sections, whether on Google or Yahoo, will tell you not only the average volume of any stock but also the daily trading volume of that stock. It is important to know the volume of any stock because it indicates whether or not you will be able to trade in and out of a particular penny stock or micro-cap company.  The picture below has the daily volume and the average volume circled for reference.

When a penny stock, micro cap company, or small cap company has no volume this essentially means that the stock is illiquid. This is another way of saying that there is no demand for that particular penny stock company’s shares or in other words it means that you will not be able to sell shares of that stock when you are ready to sell. If you look at the average volume of a penny stock or any stock for that matter it will tell you how many shares traded in that stock which means it will also tell you how much money was traded in that stock. For example if a stock has an average volume of 2000 shares traded and the stock is worth $1 then on average $2,000 is traded in that stock per day. This means if you purchase $10,000 worth of that stock generally it will be hard to sell the stock since only $2,000 per day is traded in that stock. This becomes extremely important with penny stocks that have low averages of volume and some have no average volume. This is because there is little-to-no trading activity in many penny stocks.  In the above picture, the average volume us 3,717 shares traded daily.  At 70 cents per share this means that on average the stock trades about $2601.90 per day (70 cents x 3,717 shares).  This means if you were trying to sell 10,000 shares of this stock it may be difficult and the market may not have the demand necessary for you to sell out.

No volume in a stock is a bad thing. Most people enter the public markets to make liquid investments, in other words investments that they can get out of or get into easily, and with no volume this means you may be stuck with a stock and unable to sell it.

The amount of volume in any particular stock or penny stock is contingent on the demand for that stock. The more people that place orders to purchase the stock and the more people that are willing to sell the stock equates to more trades which is what creates volume in any given penny stock or micro cap company trading publicly.  The volume of any given company is generally not an issue when you are talking about blue chip companies such as companies that are part of the Dow Jones or the S&P 500. These companies generally have enough demand and trading activity to make an investment in those stocks liquid. But when you are talking about penny stocks you must keep an eye on whether or not you will be able to sell your shares in the future.

Keep in mind that when you are looking at the average volume of any stock it is exactly what it says; an average. This means just because a stock has an average of 100,000 shares in volume does not mean that it is trading 100,000 shares a day. This could mean that it has traded 10,000 shares over 10 days or that it traded 100,000 shares in one day and then had no value at all for the other remaining three months of the average time period.  Also keep in mind that the average is for the shares in a company and not the price. This means if you had an average volume of 100 shares and the stock was only worth one penny ($0.01) then the average volume in dollar amount is only $1. This means if you bought $1,000 of the stock then you would have trouble selling it since the demand over the average time was only $1 and there are not enough sufficient buyers in the marketplace to buy the stock when you want to sell it.

In penny stocks in particular sometimes the volume spikes when a venture capital group or private investor purchases a large amount of shares in one trading day session. This means if an investor comes in and buys $100,000 worth of shares on Monday, on Tuesday you will see the average volume equate to $100,000 or more. But this does not mean that the stock is totally liquid because all of the activity, also known as the trading volume, took place on that one particular day when the investor purchased $100,000 worth of stock. In short if you are investing in penny stocks or micro-cap companies you want to be conscious of the average volume and the daily volume to be certain that when you are ready to sell the stock you will in-fact be able to sell the stock.

-Nick Coriano

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About the Author: Nicholas Coriano is a Business Consultant.  He is a graduate of The University of Connecticut Business School and the John Marshall Law School in Chicago.  He has worked at Merrill Lynch, The New York Stock Exchange and is currently a partner at Cervitude Intelligent Relations, which specializes in Investor Relations for companies valued under $1 Billion USD.

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