The stock market is very liquid – i.e. most stocks trade daily and can be bought and sold immediately, at least in reasonable quantities. However, in some cases, the stock may not trade for a day. An actively traded stock may not trade for a good period of day due to a trading halt, and thinly traded stocks may sometimes not trade for a day or more due to their ownership structure and investor funding.
A company may ask the exchange where their shares are listed to stop trading. This usually happens when important news is pending that has the potential to affect stock prices. The company feels a responsibility to pause stock trading until the news is announced so that investors can make buying and selling decisions based on new information. The suspension of trading can last for a day.
Examples of a trading pause
A small biotech company may be expecting a big decision from the U.S. Food and Drug Administration (FDA) for its flagship drug. If the drug is approved, the amount of stock can easily double; If rejected, the stock can easily lose more than 50% of its value. Some groundbreaking drug test results may also be important enough to cause a pause. Other possible reasons include major contract notices or important court rulings.
There are no goods to sell.
Some thinly traded stocks are largely owned by insiders and don’t trade much. If no shares are offered for sale, then there can be no transaction. Investors, especially institutional investors, prefer to buy stocks that they can accumulate in sufficient quantities and easily convert back into cash when needed. If not enough stock is offered for sale, they will completely stay away from a stock. If the stock does not have a market, the stock becomes so difficult to sell, that even if the insider puts the stock up for sale, there is no buyer.
Another difficulty when trading some small stocks is the lack of liquidity that can cause broad price movements. A stock quote is valid for 100 shares. If the investor places an order to buy 1,000 shares, then only the first 100 shares can be sold at the list price; The rest can be sold at a gradually higher price. The same applies to sell orders: A 1,000 sell order can be executed at a gradually lower price. To avoid overpaying or being restrained, investors place limit orders, such as orders at a specified price. In a thinly traded stock, this can lead to “war of war”, i.e. the impasse between buyers and sellers when their buy and sell limit orders are several cents apart and cannot be executed until a party moves. Such a stalemate can easily last for a day or more, with no transactions taking place.