How to avoid huge spread on micro caps?

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9th Jul '15 by value101

7 comments 7504 reads

Hello,

I am using Hargreaves & Lansdown, but the spread on BVM is 10%, and on PHSC it's 16%!
So if I buy PHSC now, I automatically and immediately making a loss of 16%

Would anyone have any tips on how to avoid such a spread?

Many thanks!

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Value101

Premium Member

7 comments

Rusty2

11th Dec '15

Not to buy shares with large spreads is one answer. I have tended now to avoid shares with a spread over 5%. But the spread is not always the same, sometimes its 10% but if there is a lot of trading or for other reasons then the spread can come down to below 5%. If you look at Water Intelligence (LON:WATR) its usually around 9% but the other day it was down to 2%, I should have bought some. Also the spread is the widest price buy/sell you can often get less wide prices, if you look on HL you can see the latest traded prices. Another tip in these sort of shares prices can move quite a bit, so to buy you can wait for a few sales and then get a quote or you can use auto bid, set a price and you may pick them up cheap.

underscored

11th Dec '15

Also consider that a large spread is an indication that there is little demand for the share, therefore if you need/decide to sell, your sale will either 1). not go through 2). move the price.

gus 1065

11th Dec '15

I use Xest (via Fidelity) which is an online account and purports to tap into 10 market makers and then offers the best price available. Not the cheapest - £9 per trade plus relevant taxes and spread - but I tend to buy and hold rather than try and trade so dealing costs are less critical for me than some others.

As it is online, it has the benefit of not requiring a telephone call - you request a quote, see the bid/offer market spread and the best offer (or bid if you are selling) and then have 15 seconds to either take it or not. Obviously, if there is only 1 MM or very thin liquidity you still face very wide spreads most of the time (or indeed sometimes no bid or offer at all and the invitation to call by 'phone). If you have the patience to reject quotes you are not happy with you can occasionally pick up some reasonably good prices.

Gus.

Edward Croft

11th Dec '15

These are £3m market cap stocks, so it's unsurprising the spreads are so wide. Really these are nano-caps, not micro-caps. There's a saying about these kinds of small companies:

"They'll let you in, but they'll never let you out"

You'll find it much easier to buy shares in these kinds of stocks than to sell them. And the time you want to sell them will be the same time as everyone else. And you don't want to be selling highly illiquid shares at the same time as everyone else... Trust me on that !

If someone has seriously done their research and feels the need to invest in nanocaps... there'sa few strategies:

Use off-market limit orders - if you have a price you'd be willing to pay for an illiquid stock, then leaving a limit order under the market GTC (good till cancelled) means you might pick up stock at a price you are willing to pay, rather than paying someone else's ask.
Use a good private broker - more expensive, but they may know where the supply is and find a price within the quoted spread that's more reasonable.
Don't trade them - (my approach) !!

There's a liquidity premium out there to be earned by people willing to invest in highly illiquid securities. Of course the premium is there because most people don't want to be stuck in illiquid securities during bad times.

Personally I haven't dared buying a sub £10m market cap company since about 1999. Huge returns if you get it right, disaster if you don't.

All imho - DYOR etc.

value101

12th Dec '15

Thanks a lot everyone for your comments!
In the end, I decided to avoid such companies. The liquidity risk would be too high for me.

ed_miller

26th Jan '18

Hi Ed - Can you (or your colleagues, such as Paul Scott) suggest any private brokers that might be particularly good at getting very best prices on AIM micro-caps, for me to look into further, or at least clarify a few of the ways a good stock broker can improve prices on illiquid stocks for their clients, please? I understand that Selftrade offers the convenience of online execution-only at a low price yet gathers prices from up to 20 RSPs. Perhaps it's worth paying much more in commission and account fees to a good private broker though, if they have RSPs in different venues - not something I know much about, nor their price-improvement processes via the LSE RSP Gateway etc, so I'm a bit confused as to whether it really is better for me to pay the much higher fees for a private broker versus Selftrade's 20-RSP price gathering. I have about £400k in ISAs to move to somewhere that will do much better than the dire execution I've had with online discount brokers (price & availability - Jarvis X-O has been worst of all). Whilst I don't want to trade in and out of AIM micro-caps, I have been using price action more recently for timing entry and exit according to the major price trend, rather than holding through hell and high water (and profit warnings), as I used to, so I'm loathe to pay the %age-based commission & fees of the private brokers, but I suspect I'll end up wealthier and with more shares if I just suck it up? And is it really better than just dealing through the dealing desk of a discount broker such as Interactive Investor via phone, for a still cheapish commission?

Thanks in advance for any pointers/ views you/ Paul etc can offer - not coming from a finance background, I don't personally know anyone with the inside track who can explain how a private broker can add value beyond Selftrade's 20-RSP price gathering, or the telephone trading desks of the discount brokers - which I suspect they can - if I could clarify that I'd be happier to accept the inconvenience of much higher %age-based fees and telephone dealing. (I shall be getting Level 2 price data & moving my SIPP & dealing account to iDealing.com in anticipation of being granted Professional Client status in due course (I should shortly meet the MiFID II requirements inc frequency of trading over past 4 quarters) & therefore being granted DMA so I can place my own orders direct, but I suspect I'd nevertheless be better off using DMA for mid-caps & large-caps and still paying a pricey private broker to deal my AIM micro-caps.)

Regards,
Ed
PS - A good subject for a Stockopedia discussion thread, or investor conference presentation?

weycome45

28th Jan '18

Use Barclays Smart Investor as they only charge £6 to buy and £6 to sell and they are a trusted name. Go any cheaper and you will have sleepless nights. They are seriously denting all the other overpriced "big names " who I have heard are under pressure to bring comm rates down.

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How to avoid huge spread on micro caps?

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Value101

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