An illiquid preferred stock that I would like to buy is currently (9:43AM) trading at
4.48 bid for 700 shares 5.04 offered for 100 sharesOther things being equal, investors should avoid such illiquid shares, but I think this one is extremely undervalued. I wonder what methods people use to trade in such stocks. Maybe wait for the stock to open, place a limit order at or slightly above the bid, and cancel and replace the order daily until filled.
To clarify for newbies, preferred stocks usually are low volume; relatively few shares are available for buying and selling. It is not like trying to buy 100 shares of Pepsi, where one is practically guaranteed to get one's limit price as long as the day's trading shows the price range included said limit price. With many (all?) preferreds, the sort of mismatch between shares desired and shares available at a certain price is, as Beliav points out, common.
In my experience patience with orders for preferreds is key. I think the strategy Beliav proposes (limit order shortly after opening; cancel order after end of trading; new order next day shortly after opening) is fine.
Generally speaking, I wonder whether a fund of preferreds might be a good small allocation for the typical person planning his/her portfolio for retirement.
Disclosure yada: I have owned several preferreds, all investment grade per quantumonline.com. I sold all but one at gains well before the Second Great Depression started. The sole preferred I own now is way down but not at crisis levels. (Though this is hard to ascertain.) I am not selling it but see if I wanted to sell my 700 shares today it would be tricky. Maximum volume today at one point so far was about
2000 shares.
There is probably no market maker for that issue. You can certainly pick up 100 shares for $5.04, if you want more than that you might have to go to $5.10.
If there was a market maker for the issue you want to bid somewhere in between like $4.80.
-- Ron
This is a problem I've studied quite a bit - the broad topic is market microstructure. The quick/short answer is probably "use limit orders near or outside the spread, trade patiently, and be willing to not-own the stock."
It can be helpful to watch the order book so you see the depth of the market. Sometimes you can also detect market-maker behavior by watching shares get replaced (or not) as orders get filled (google: [iceberg order]). I think a lot of the online discount brokerage firms let you see that now in real time. One possible source is the Arca Web book, which I believe is still free to retail investors who register.
On the general topic though my latest read is Stock Market Liquidity, Lhabitant & Gregoriou, 2008 Wiley Finance - highly recommend it for a quant such as yourself, if you have an interest in the broader topic. Also, a good google search term (other than [market microstructure] is VWAP - it's a measure that professional traders use to gauge their day's trades. Perhaps some resources on improving VWAP would give you some ideas.
-Tad
You certainly need to use a limit order. The rest depends on how badly you want it. You could just put a good 'till cancelled order for the most you are willing to pay. I've decent luck with putting in an order about half way between bid and ask. -- Doug
Unless you can see the market depth, your bid will be the high bid that you will see, so how will you adjust your bid?
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