[Learning from Scratch] Investment Terminology Note #079 "Thinly Traded Stocks"

🗓 Week 14 Day 1 | Category: Stocks ⏱ Estimated reading time: 3 minutes | Difficulty: ★★☆☆☆

📌 Today's Term: Thinly Traded Stocks

In a nutshell: "Stocks with a small number of shares in circulation, where prices are prone to significant movement with only a small amount of trading."

📖 Definition

Stocks with a low number of shares circulating in the market. This can occur either when the total number of issued shares is low, or when the total number of issued shares is high but the majority is held by stable shareholders such as founding families or parent companies, limiting the number of shares available in the market. Because there are few people looking to buy or sell, trades are difficult to execute, and stock prices are prone to sharp fluctuations.

🔍 A Closer Look

The stock classifications we learned up to Week 13, such as thematic stocks and blue-chip stocks, focused on the industry or quality of the company. In Week 14, we will shift our perspective to focus on stock supply, demand, and circulation volume. The first day covers thinly traded stocks.

There are mainly two backgrounds for the creation of thinly traded stocks. One is the case where the total number of issued shares is small. The other is the case where, even if the number of shares is large, major shareholders hold most of them and they are not released to the market. The latter is also referred to as stocks with a low free-float ratio. We will cover this in detail on Day 2 tomorrow.

The biggest characteristic of thinly traded stocks is the volatility of their price movements. A slight increase in buy orders can cause the stock price to jump, while conversely, if sell orders appear, the price can collapse all at once. Because the order book is thin, market orders are likely to be executed at prices less favorable than expected. It can be said that these are stocks where the wild fluctuations (#025) we learned about in Week 5 occur on a daily basis.

Another point to be cautious about is the risk of stock price manipulation. The lower the circulation volume, the easier it is to move the stock price with a small amount of capital. As we learned with speculative stocks (#040) in Week 7, thinly traded stocks are easily targeted for intentional trading to drive up prices.

📊 Looking at the Data

Let's confirm the volatility of thinly traded stocks with numbers.

Comparing the top stocks by trading value on the Tokyo Stock Exchange Prime Market with thinly traded stocks, it is not rare for thinly traded stocks to reach a daily price range of 3-5%. This is in contrast to large-cap stocks with high trading value, which often stay within around 1% on many days.

As a guideline for the free-float ratio, the Japan Company Handbook (Toyo Keizai) defines the total number of shares held by shareholders with 1 unit or more but less than 50 units as free-float shares. Free-float market capitalization is also used in the calculation of TOPIX constituent stocks, and in the 2025 revision, moves to exclude policy-held shares from free-float shares progressed. Companies with many policy-held shares, such as Toyota Motor and Daikin Industries, saw their free-float ratios decrease, and their TOPIX weighting also shrank.

Among thinly traded stocks, those with high price levels are called high-priced thinly traded stocks. Combining the high-priced stocks (#016) we learned about in Week 3 with thinly traded stocks, they sometimes have the power to move the Nikkei Stock Average by hundreds of yen.

💼 Practical Application

There are three checkpoints when dealing with thinly traded stocks.

First, check the trading volume. Stocks with a daily trading volume of only a few hundred shares carry the risk of being stuck at the exit even if you can enter. You want to choose days with at least 10 times the trading volume of the number of shares you want to trade.

Next, look at the depth of the order book. Stocks with a wide gap between the bid and ask prices have high spread costs. Make limit orders your standard and avoid market orders.

Finally, check the floating stock ratio. The Japan Company Handbook and TOPIX floating stock ratio data are useful references. Stocks with a ratio below 20% can be judged as having a high risk of being thinly traded.

⚠️ Common Misconceptions

❌ Misconception: Thinly traded stocks are good targets because they are easy to increase in price.

✅ Reality: Thinly traded stocks move significantly both upward and downward. If buying gathers, they surge, but if selling occurs, they plummet. Moreover, because liquidity is low, you cannot escape when the price drops. If you jump in expecting only a rise, you are likely to fall into a situation where there are no buyers when you want to sell. You need to understand that high price volatility and risk go hand in hand with thinly traded stocks.

🔗 Related Terms

Week 3's high-priced stocks (#016) refer to stocks with high share prices, but when they overlap with thinly traded stocks, they become high-priced thinly traded stocks, increasing their influence on the Nikkei Stock Average. Week 5's wild fluctuations (#025) are typical price movements that occur easily with thinly traded stocks. Week 7's speculative stocks (#040) is a related term indicating that thinly traded stocks are easily targeted. Week 10's low-priced stocks (#055) often have the opposite liquidity to thinly traded stocks, but there are also combinations of ultra-low-priced and thinly traded stocks.

Tomorrow's floating stock (#080) is a term for grasping the cause of thinly traded stocks numerically. If you know the floating stock ratio, you can judge in advance which stocks are likely to become thinly traded.

💡 Today's Summary

✅ Thinly traded stocks have a small number of shares circulating in the market, and the stock price moves significantly with a small amount of trading.

✅ Stocks with a low floating stock ratio or a small number of issued shares are likely to become thinly traded stocks.

✅ If you jump in just because you expect a price increase, you will face liquidity risk. Always check the trading volume and the depth of the order book.

📗 Tomorrow's Preview

Tomorrow, I will explain "floating stock".

It is a term for grasping the cause of thinly traded stocks with numbers. If you know the difference between stable shareholders and floating stocks, the accuracy of your stock selection will improve by one level.

📎 Series List

Phase 1: Basics of Investment

• Week 1-13: Stocks ✅

• Week 14-23: Stocks ← You are here

• Week 24-48: Market, Proverbs, Origins

• Week 49-71: Securities Market

• Week 72-93: Investment Trusts

Phase 2-7: Economy, Analysis, Trading, Financial Products, Systems, Advanced Level... (Total 467 weeks)

📊 Let's practice at the Stock Support Research Institute

Why not check this term using actual market data?

▶ You can grasp the price movement of the entire sector at a glance

▶ Check this term in the glossary