The list of illiquid stocks has been drawn up as per the direction of Securities and Exchange Board of India (Sebi) based on criteria jointly agreed between BSE, NSE and Sebi. The exchanges provides the list of illiquid stocks to the trading members on a monthly basis and advise to exercise additional due diligence while trading in these securities either on own account or on behalf of their clients.
The BSE has come out with a list of 1,585 illiquid securities and NSE 304 shares. Some of the shares are listed on both NSE and BSE. Though 1585 stocks account for 59 per cent of the total stocks traded on BSE, their share only three per cent of the market capitalisation of BSE.
Generally the stocks with strong promoters holding are illiquid as the promoters do not play in the market with their holdings. Of the 1585 illiquid stocks, almost 75 per cent or 1,186 stocks has promoter holding of over 50 per cent while 525 has promoters holding between 25 and 50 per cent while 174 has promoters holding below 25 per cent.
On the perusal of list it reveals that few stocks such as Koutons Retails, B L Kashyap, Madhucon Projects, Shopper's Stop and Ess Dee Aluminium had comfortably high volumes some time ago when these stocks were in news. Similarly, listed subsidiaries of State Bank of India had sufficient liquidity when news of merger with SBI was in the air.
There are few stocks of multination companies which are currently in the buyback list. The promoters of Gillett Indian, Blue Dart Express and Gokaldas Exports are in the process of delisting their companies. The list also includes prominent companies such as Godfrey Phillips India, CRISIL, Glaxo SmithKline Consumer etc.
Liquidity refers to the ease with which you can buy or sell a stock at or near the current market price. For an illiquid stock, the concept of a market price has much less meaning. The dealing in illiquid stocks is risky as it increases impact cost. The buyers has to pay higher price and sellers will get lower price if he want to acquire requisite quantity.
Illiquid stocks are highly unsuitable for quick trading strategies. You should only buy such a stock if you are comfortable with holding it for several years. All trades of illiquid stocks require caution. Orders to buy or sell at the market should never be used. Rather, limit orders should be used. Patience will usually be rewarded with a lower purchase or a higher selling price.
