Know Who Is Trading

If you don't know who the sucker is, it is probably you!

Share Price Volatility Is Affected By Volume And Trader Types

As the plan is to hold for a short period of time it is vital that you understand who else are currently trading the shares.

Quite recently I was very interested in Amigo Loans (AMGO) but the trade volumes were around £100k per day.

They are quite an unusual company in that the founder still owned around 60% of the shares but had a non-interfere agreement and disliked the boards managing of the business intensely.

About 30% of the shares were owned by a handful of institutions and despite the issues the company was facing I was sure of its future.

The floated portion was initially released at around 275p and had sunk to 14p but in practice the share price was affected by only a few people, James Benamor and his 60% and the people running the investment for the institutions.

So in practice there was no market.

Why who Else Is Buying A Share Matters

When deciding to trade in a share it may be useful to group the type of traders into groups such as those shown below.
  1. Automated Trading Systems

  2. Full time managing other people's money limited by rules, etc FTSE 100, 250, 350 companies only

  3. Full time managing other people's money not limited by rules

  4. Full time managing their own money

  5. Part time managing their own money

  6. Dabblers mismanaging their own money

The type of trader buying a company's shares will have a significant impact on the likely rate of price changes and the range of the price.

If you then consider why each of the groups is or is not trading that particular share it may help in deciding if you are missing something and what the overall market impression is of a company.

Clearly many shares are traded by many of the groups above, but the types of trader responsible for the majority of the trades are the ones that we are interested in.

The more a share is traded by an automated system the more likely it is to exhibit trends that can be seen, such as a ceiling that exists at an apparently random point, the point where the automated system is programmed to take profits.

The more a share is traded by private individuals the greater its volatility but the less relevant analysis of trends and floors and ceilings is.

Sometimes a share will be displaying a lot of volatility, potentially making it an ideal candidate, but after looking at the volumes and the value of the volume it becomes clear that it is being traded in orders in the range of £500-£5000.

This suggests that it is only the small private trader involved which means that you are exposing yourself to very high risk.

When shares are only being traded by small traders at a volatile price it can be difficult to buy and sell in batches worth as little as a few thousand pounds. If you have to make five-ten trades to sell a pot then it is likely that the selling price will start to drop off during this process.

This type of share may also have big spreads, once you get into spreads of 3% plus then trading that share becomes even more risky.

And yes... a £5K pot will hit this condition in the real world.

Remember a "Contrarian Investor" is someone who buys what the market doesn't like, it does not mean someone who buys every falling share.