Consequences of buying/selling a large number of shares for a low volume stock?
"The effect of making a single purchase, of size and timing described, would not cause market disequilibrium, it would only hurt you (and your P&L). As @littleadv said, you would be unlikely to get your order filled.  You asked about making a ""sudden"" purchase. Let's say you placed the order and were willing to accept a series of partial fills e.g. in 5,000 or 10,000 share increments at a time, over a period of hours. This would be a more moderate approach. Even spread out over the span of a day, this remains unwise.  A better approach would be to buy small lots over the course of a week or month. But your transaction fees would increase. Investors make money in pink sheets and penny stocks due to increases in share price of 100% (on the low end), with a relatively small number of shares. It isn't feasible to earn speculator profits by purchasing huge blocks (relative to number of shares outstanding) of stock priced < $1.00 USD and profit from merely 25%  price increases on large volume." "I've alway thought that it was strange, but the ""price"" that gets quoted on a stock exchange is just the price of the last transaction. The irony of this definition of price is that there may not actually be any more shares available on the market at that price. It's also strange to me that the price isn't adjusted at all for the size of the transaction. A transaction of just 1 share will post a new price even if just seconds earlier 100,000 shares traded for a different price. (Ok, unrealistic example, but you get my point.) I've always believed this is an odd way to describe the price. Anyway, my diatribe here is supposed to illustrate the point that the fluctuations you see in price don't really reflect changing valuations by the stock-owning public. Each post in the exchange maintains a book of orders, with unmatched buy orders on one side and unmatched sell orders on the other side. If you go to your broker and tell him, ""fill my order for 50,000 shares at market price"", then the broker won't fill you 50,000 shares at .20. Instead, he'll buy the 50 @ .22, then 80 @ .23, then 100 @ .30, etc. Because your order is so large compared to the unmatched orders, your market order will get matched a bunch of the unmatched orders on the sell side, and each match will notch the posted price up a bit. If instead you asked the broker, ""open a limit order to buy 50000 shares at .20"", then the exchange will add your order to the book: In this case, your order likely won't get filled at all, since nobody at the moment wants to sell at .20 and historically speaking it's unlikely that such a seller will suddenly appear. Filling large orders is actually a common problem for institutional investors: http://www.businessweek.com/magazine/content/05_16/b3929113_mz020.htm http://www.cis.upenn.edu/~mkearns/papers/vwap.pdf (Written by a professor I had in school!)" First, If you buy $10K of a penny stock and try to sell it that afternoon, you probably won't get your money back. The bid/ask spread may cost you dearly.  On the shady side, if you are able to afford to trade enough shares to attract attention, the interest of those who believe the volume is an indication of some real event happening, you may pump it high enough to make some nice money, selling into the ensuing rise. This is a classic pump and dump (which often but not always, includes posts on message boards) and it is illegal. The same way this volume attracts traders, it can also attract the attention of the SEC.  This should be read as a narrative, not as advice. If anything, it's advice on what not to do. If you are the only one who puts in a large market buy order, then it would definitely push the price up. How much up would depend on how many would be willing to sell at what price point. It would also be possible that your trade will not get executed as there are no sellers. The same would be true if you put in a large sell order, with no buyers. The price would go down or trade not get executed as there aren't enough buyers. It's illegal and you can go to jail because it exploits the small companies and their investors who believe in the company.
"In general, there should be a ""liquidity premium"" which means that less-liquid stocks should be cheaper. That's because to buy such a stock, you should demand a higher rate of return to compensate for the liquidity risk (the possibility that you won't be able to sell easily). Lower initial price = higher eventual rate of return. That's what's meant when Investopedia says the security would be cheaper (on average). Is liquidity good? It depends. Here's what illiquidity is. Imagine you own a rare piece of art. Say there are 10 people in the world who collect this type of art, and would appreciate what you own. That's an illiquid asset, because when you want to sell, maybe those 10 people aren't buying - maybe they don't want your particular piece, or they all happen to be short on funds. Or maybe worse, only one of them is buying, so they have all the negotiating leverage. You'll have to lower your price if you're really in a hurry to sell. Maybe if you lower your price enough, you can get one of the 10 buyers interested, even if none were initially. An illiquid asset is bad for sellers. Illiquid means there aren't enough buyers for you to get a bidding war going at the time of your choosing. You'll potentially have to wait around for buyers to turn up, or for a stock, maybe you'd have to sell a little bit at a time as buyers want the shares. Illiquid can be bad for buyers, too, if the buyer is for some reason in a hurry; maybe nobody is selling at any given time. But, usually buyers don't have to be in a hurry. An exception may be if you short sell something illiquid (brokers often won't let you do this, btw). In that case you could be a forced buyer and this could be very bad on an illiquid security. If there are only one or two sellers out there, they now have the negotiating leverage and they can ask whatever price they want. Illiquidity is very bad when mixed with margin or short sales because of the potential for forced trades at inopportune times. There are plenty of obscure penny stocks where there might be only one or two trades per day, or fewer. The spread is going to be high on these because the bids at a given time will just be lowball offers from buyers who aren't really all that interested, unless you want to give your stock away, in which case they'll take it. And the asks are going to be from sellers who want to get a decent price, but maybe there aren't really any buyers willing to pay, so the ask is just sitting there with no takers. The bids and asks may be limit orders that have been sitting open for 3 weeks and forgotten about. Contrast with a liquid asset. For example, a popular-model used car in good condition would be a lot more liquid than a rare piece of art, though not nearly as liquid as most stocks. You can probably find several people that want to buy it living nearby, and you're not going to have to drop the price to get a buyer to show up. You might even get those buyers in a bidding war. From illiquid penny stocks, there's a continuum all the way up to the most heavily-traded stocks such as those in the S&P500. With these at a given moment there will be thousands of buyers and sellers, so the spread is going to close down to nearly zero. If you think about it, just statistically, if there are thousands of bids and thousands of asks, then the closest bid-ask pair is going to be close together. That's a narrow spread. While if there are 3 bids and 2 asks on some illiquid penny stock, they might be dollars away from each other, and the number of shares desired might not match up. You can see how liquidity is good in some situations and not in others. An illiquid asset gives you more opportunity to get a good deal because there aren't a lot of other buyers and sellers around and there's some opportunity to ""negotiate"" within the wide spread. For some assets maybe you can literally negotiate by talking to the other party, though obviously not when trading stocks on an exchange. But an illiquid asset also means you might get a bad deal, especially if you need to sell quickly and the only buyers around are making lowball offers. So the time to buy illiquid assets is when you can take your time on both buying and selling, and will have no reason for a forced trade on a particular timeline. This usually means no debt is involved, since creditors (including your margin broker) can force you to trade. It also means you don't need to spend the money anytime soon, since if you suddenly needed the money you'd have a forced trade on your hands. If you have the time, then you put a price out there that's very good for you, and you wait for someone to show up and give you that price - this is how you get a good deal. One more note, another use of the term liquid is to refer to assets with low or zero volatility, such as money market funds. An asset with a lot of volatility around its intrinsic or true value is effectively illiquid even if there's high trade volume, in that any given point in time might not be a good time to sell, because the price isn't at the right level. Anyway, the general definition of a liquid investment is one that you'd be comfortable cashing out of at a moment's notice. In this sense, most stocks are not all that liquid, despite high trading volume. In different contexts people may use ""liquid"" in this sense or to mean a low bid-ask spread." "The offering price is what the company will raise by selling the shares at that price.  However, this isn't usually what the general public sees as often there will be shows to drive up demand so that there will be buyers for the stock.  That demand is what you see on the first day when the general public can start buying the stock.  If one is an employee, relative or friend of someone that is offered, ""Friends and Family"" shares they may be able to buy at the offering price. Pricing of IPO from Wikipedia states around the idea of pricing: A company planning an IPO typically appoints a lead manager, known as   a bookrunner, to help it arrive at an appropriate price at which the   shares should be issued. There are two primary ways in which the price   of an IPO can be determined. Either the company, with the help of its   lead managers, fixes a price (""fixed price method""), or the price can   be determined through analysis of confidential investor demand data   compiled by the bookrunner (""book building""). Historically, some IPOs both globally and in the United States have   been underpriced. The effect of ""initial underpricing"" an IPO is to   generate additional interest in the stock when it first becomes   publicly traded. Flipping, or quickly selling shares for a profit, can   lead to significant gains for investors who have been allocated shares   of the IPO at the offering price. However, underpricing an IPO results   in lost potential capital for the issuer. One extreme example is   theglobe.com IPO which helped fuel the IPO ""mania"" of the late 90's   internet era. Underwritten by Bear Stearns on November 13, 1998, the   IPO was priced at $9 per share. The share price quickly increased   1000% after the opening of trading, to a high of $97. Selling pressure   from institutional flipping eventually drove the stock back down, and   it closed the day at $63. Although the company did raise about $30   million from the offering it is estimated that with the level of   demand for the offering and the volume of trading that took place the   company might have left upwards of $200 million on the table. The danger of overpricing is also an important consideration. If a   stock is offered to the public at a higher price than the market will   pay, the underwriters may have trouble meeting their commitments to   sell shares. Even if they sell all of the issued shares, the stock may   fall in value on the first day of trading. If so, the stock may lose   its marketability and hence even more of its value. This could result   in losses for investors, many of whom being the most favored clients   of the underwriters. Perhaps the best known example of this is the   Facebook IPO in 2012. Underwriters, therefore, take many factors into consideration when   pricing an IPO, and attempt to reach an offering price that is low   enough to stimulate interest in the stock, but high enough to raise an   adequate amount of capital for the company. The process of determining   an optimal price usually involves the underwriters (""syndicate"")   arranging share purchase commitments from leading institutional   investors. Some researchers (e.g. Geoffrey C., and C. Swift, 2009) believe that   the underpricing of IPOs is less a deliberate act on the part of   issuers and/or underwriters, than the result of an over-reaction on   the part of investors (Friesen & Swift, 2009). One potential method   for determining underpricing is through the use of IPO Underpricing   Algorithms. This may be useful for seeing the difference in that ""theglobe.com"" example where the offering price is $9/share yet the stock traded much higher than that initially." "Many people assume that if the price of something is $10 and they have 1,000 of that thing, they should expect to be able to sell them for something around $10,000.  Such an assumption may hold much of the time, but it doesn't always.  Worse, the cases where it fails to hold are often those where it would be relied upon most heavily.  Such an assumption should thus be considered dangerous. In a liquid market, the quantity of a something that people would be willing to buy at something close to the market price will be large relative to the quantity that people would seek to sell in the short term.  If at some moment in time one person in the market was willing to immediately buy 500 shares at $9.98 and another was willing to immediately buy 750 at $9.97, someone seeking to sell 1,000 shares could immediately receive $997.50 for them (selling 500 to the first person and 500 to the second, who would then be ready to buy 250 more from the first person who was willing to sell for $9.97).  Such behavior would be in line with what many people's assumptions. In an illiquid market, however, the quantity of something that people would be willing to buy near market price could be surprisingly low.  This is more often a problem in the marketplace of things like collectibles than of stocks, but the same thing can happen in the stock market.  If there's one potential buyer for a stock who thinks it's overpriced but has potential and would be worth $9.50, but that person only has $950 to spend, and nobody else thinks the stock would be worth more than $0.02/share, then until people sold a total of 100 shares the price would be $9.50, but after that the price would drop instantly to $0.02.  There would be no ""cushioning"" of the fall.  If the person with 1,000 shares was first in line, he'd get to sell 100 shares for $950 to the aforementioned seller, but would be unable to get more than $18 for the remaining 900. A major danger with markets is that markets which are perceived as liquid attract people to the buying side, while those which are seen as illiquid repel people.  The danger in the latter is obvious (having people flee a seemingly-illiquid market will reduce its liquidity further) but the former is just as bad.  Having people flock to a market because of its perceived liquidity will increase its liquidity, but can also create a ""false price floor"", causing demand to appear much stronger than it actually is.  Unless real demand increases to match the false price floor, the people who buy at the higher price will never be able to recoup their investment." "I probably don't understand something. I think you are correct about that.  :) The main way money enters the stock market is through investors investing and taking money out. Money doesn't exactly ""enter"" the stock market.  Shares of stock are bought and sold by investors to investors.  The market is just a mechanism for a buyer and seller to find each other. For the purposes of this question, we will only consider non-dividend stocks. Okay. When you buy stock, it is claimed that you own a small portion of the company. This statement has no backing, as you cannot exchange your stock for the company's assets. For example, if I bought $10 of Apple Stock early on, but it later went up to $399, I can't go to Apple and say ""I own $399 of you, here you go it back, give me an iPhone."" The only way to redeem this is to sell the stock to another investor (like a Ponzi Scheme.) It is true that when you own stock, you own a small portion of the company.  No, you can't just destroy your portion of the company; that wouldn't be fair to the other investors.  But you can very easily sell your portion to another investor.  The stock market facilitates that sale, making it very easy to either sell your shares or buy more shares. It's not a Ponzi scheme.  The only reason your hypothetical share is said to be ""worth"" $399 is that there is a buyer that wants to buy it at $399.  But there is a real company behind the stock, and it is making real money. There are several existing questions that discuss what gives a stock value besides a dividend: The stock market goes up only when more people invest in it. Although the stock market keeps tabs on Businesses, the profits of Businesses do not actually flow into the Stock Market. In particular, if no one puts money in the stock market, it doesn't matter how good the businesses do. The value of a stock is simply what a buyer is willing to pay for it.  You are correct that there is not always a correlation between the price of a stock and how well the company is doing.  But let's look at another hypothetical scenario. Let's say that I started and run a publicly-held company that sells widgets.  The company is doing very well; I'm selling lots of widgets.  In fact, the company is making incredible amounts of money.  However, the stock price is not going up as fast as our revenues.  This could be due to a number of reasons: investors might not be aware of our success, or investors might not think our success is sustainable.  I, as the founder, own lots of shares myself, and if I want a return on my investment, I can do a couple of things with the large revenues of the company: I can either continue to reinvest revenue in the company, growing the company even more (in the hopes that investors will start to notice and the stock price will rise), or I can start paying a dividend.  Either way, all the current stock holders benefit from the success of the company." If a company doesn't take out loans to buy back the shares, is it still a bad move? I don't necessarily see the problem with companies retiring shares.  If the shares of say Apple have a P/E ratio of 10 and the price to book value max of 1. Wouldn't it be a smart move by the company and the share holders assuming the projected net revenue will hold for at least ten years if not increase.   I guess I don't know the true practice of buying back shares but at its core (could be more corrupt), I just don't see it as inherently bad. NSCC illiquid charges are charges that apply to the trading of low-priced over-the counter (OTC) securities with low volumes. Open net buy quantity represents the total unsettled share amount per stock at any given time during a 3-day settlement cycle. Open net buy quantity must be less than 5,000,000 shares per stock for your entire firm Basically, you can't hold a long position of more than 5 million shares in an illiquid OTC stock without facing a fee. You'll still be assessed this fee if you accumulate a long position of this size by breaking your purchase up into multiple transactions. Open net sell quantity represents the total unsettled share amount per stock at any given time during a 3-day settlement cycle. Open net sell quantity must be less than 10% percent of the 20-day average volume If you attempt to sell a number of shares greater than 10% of the stock's average volume over the last 20 days, you'll also be assessed a fee. The first link I included above is just an example, but it makes the important point: you may still be assessed a fee for trading OTC stocks even if your account doesn't meet the criteria because these restrictions are applied at the level of the clearing firm, not the individual client.  This means that if other investors with your broker, or even at another broker that happens to use the same clearing firm, purchase more than 5 million shares in an individual OTC stock at the same time, all of your accounts may face fees, even though individually, you don't exceed the limits. Technically, these fees are assessed to the clearing firm, not the individual investor, but usually the clearing firm will pass the fees along to the broker (and possibly add other charges as well), and the broker will charge a fee to the individual account(s) that triggered the restriction. Also, remember that when buying OTC/pink sheet stocks, your ability to buy or sell is also contingent on finding someone else to buy from/sell to. If you purchase 10,000 shares one day and attempt to sell them sometime in the future, but there aren't enough buyers to buy all 10,000 from you, you might not be able to complete your order at the desired price, or even at all. That makes sense.  So it's sort of a thoughtless process on a short time scale, but if you add up all that noise over time you could (potentially) end up with a more meaningful position than if you had valued and bet on each stock individually.  And I could see how these things could spread along a chain to unrelated stocks as well... When you buy a stock, the worst case scenario is that it drops to 0.  Therefore, the most you can lose when buying a stock is 100% of your investment. When you short a stock, however, there's no limit on how high the stock can go.  If you short a stock at 10, and it goes up to 30, then you've lost 200% on your investment.  Therefore shorting stocks is riskier than buying stocks, since you can lose more than 100% of your investment when shorting. because the price might go up, but it will never be as big of a change as a regular price drop i suppose... That is not true.  Stocks can sometimes go up significantly (50-100% or more) in a very short amount of time on a positive news release (such as an earnings or a buyout announcement).  A famous example occurred in 2008, when Volkswagen stock quintupled (went up 400%) in less than 2 days on some corporate news: Porsche, for some reason, wants to control Volkswagen, and by building up its stake has driven up the price. Hedge funds, figuring the share price would fall as soon as Porsche got control and stopped buying, sold a lot of VW shares short. Then last weekend, Porsche disclosed that it owned 42.6 percent of the stock and had acquired options for another 31.5 percent. It said it wanted to go to 75 percent. The result: instant short-squeeze. The German state of Lower Saxony owns a 20 percent stake in VW, which it said it would not sell. That left precious few shares available for anyone else. The shorts scrambled to cover, and the price leaped from about €200, or about $265, to above €1,000.