markets
You Are The Market
The rule
When your holding is too big for the stock to absorb, your own selling pushes the price down against you before you can get out.
Where it flips
For a small retail investor in a large, heavily-traded stock this rarely bites, and worrying about it can scare you out of perfectly easy-to-sell holdings. The fix is to weigh your holding against the stock's daily traded volume - the danger is real only when what you hold is large next to how much normally changes hands.
The quoted price assumes you are a small player who can slip in and out without being noticed. But if you hold a big chunk of a thinly-traded stock, there simply are not enough buyers to take it all at once. So as you sell, you become the main seller and push the price lower with every lot. In a hurry this feeds on itself: your selling scares others, they sell too, and the exit you counted on shuts faster than you expected.
A worked example
Aman builds a ₹10,00,000 stake in a tiny company that trades only ₹2,00,000 of shares a day. When he needs out quickly, spreading his sell over the week still drops the price 20%, because he is most of the volume. [illustrative]
How to spot it
- ·Your holding is a big share of the stock's daily volume
- ·The price moves whenever you place a large order
- ·You would need several days to exit without a discount
Roger Lowenstein · When Genius Failed