Look at Liquidity before investing in SGX traded stocks and ETF

The Business Times journalist commented recently on the low volume of trade for the STI ETF on the Singapore Exchange in his article titled “Do something to boost STI ETF trading” (R Sivanithy, 11 April 2007). On 9 April Monday, only 5,000 units of the STI Exchange Traded Fund (ETF) changed hands. On the other hand, a similar type instrument MSCI Singapore Index Fund had a staggering 5.4 million units traded on the New York Stock Exchange (NYSE) on the same day.

(To know about STI ETF -Straits Times Index Exchange Traded Fund, refer to my posting – Financial Tip #23 on 10 January 2007.)

As at 3.04 pm today, only 600 units of STI ETF changed hands. Besides, STI ETF, some stocks also have low trading volumes. One example is the SBS 500 stock (SBS Transit). The trading volume was just 71,000 units. When we look at the Market Top 20 stocks based on volume of shares traded, the volumes exceed 17 million units each. Granted all, except for one, are penny stocks and hence explains somewhat the high volume of shares traded. But, for most active stocks traded, including shares like Singapore Telecoms, the trading volumes of these stocks in a typical day run into millions.

What does it says for low volume stock? It means that these stocks are illiquid. There are few players in the market transacting on these stocks. This may translate into desperation if one wants to sell the stock in the Stock Exchange in the future after you have bought them. Would you want to invest in stocks that are illiquid?

Written on 4/13/2007 3:47 PM

Copyright © 2007, the author known as LKT in Singapore.

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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