In the past few days we kept seeing multiple IPO’s collapse under massive selling pressure. Looking at the stocks, this represents nothing overly critical to the market, owing to their small size & limited relevance to general market health. Still, they’re worth paying attention to in order to revisit an old trap that many novel traders fall prey to regularly.
Take, for example, a look at both Hong Kong’s Samfine Holdings Group (SFHG), selling off -85.5% in a single day, and American BioAge Lab (BIOA) gapping down -76% over night on some negative news on its drug trial.
Though the latter is a biotech, and biotech companies are essentially unproven niche research labs run by a PR department and going public to get funding, some old lessons have to be repeated – novel traders should stay away from illiquid stocks, especially skyrocketing lightweight IPO’s and biotech’s without a proven track record. Also: China. BIOA’s market cap, before the collapse, was 687M$, and traded 6.7M$ in daily dollar volume. SFHG’s numbers were at 43M$ and 16$M. In fact, SFHG trades about half its float per day, give or take.
Your stop loss, should you use one, might not even trigger as in the case of BIOA – and even if it should, the limited liquidity will make you lose much more than your bargained for. Leave these propositions behind – the added risk is just not worth it. There is a case to be made to trade specific stocks of lower liquidity, in fact I do so with regularity, but we require to adjust for the higher risk quite stringently, and need to select our bets even more so carefully.
So long,
TGS
