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What are the main factors affecting a stock's liquidity? Specifically why does the value of some stocks fluctuate wildly when only a small fraction of the outstanding stock is traded? I have a specific example in mind where only a relatively small fraction of the oustanding shares (rougly 30%) are held by insiders and institutions.

Thanks - Tom
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<<What are the main factors affecting a stock's liquidity? Specifically why does the value
of some stocks fluctuate wildly when only a small fraction of the outstanding stock is
traded?>>

Liquidity, as a general matter, is a the ability to convert an asset into cold hard cash. Stock exchanges (and NASDAQ) are secondary markets in which people can make trades quickly and easily that adds to the liquidity of a stock.

To address you specific question, the stock you describe is what they call a "thinly traded" issue. Because the volume of trading in those shares is small relative to the total number of shares outstanding, the price the shares trade at do not necessarily reflect the true value of the shares. With thinly traded issues, it becomes increasingly difficult to match up the Bids (prices people are willing to buy a stock) and the Asks (prices people are willing to sell a stock) because they demand for a stock is sparse. Hence, there is wild price fluctuation at times.

Why is one stock more "thinly traded" than another? It can be for a number of reasons. Some stocks, such as Over-the-Counter Bulletin Board stocks have lower demand and are ofen not via an automated mechanism (i.e. the "pink sheets"). These stocks are traded by matching orders up, on paper, by hand, by a broker. This sometimes takes extensive periods of time.

In essense, demand for a stock is probably the largest factor affecting liquidity. Although, by no means is it the only one. For example, some securities are illiquid because of transfer restrictions. Hope this helps!

Fool On,
D.P.
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