What happens if you sell a small cap stock whose price is freefalling?
1) Is the specialist still required to buy it? For larger stocks, there will almost always be those speculating that the price will one day rebound, but for a tiny stock whose volume is only a few hundred or thousand a day, is there even a specialist? (For example, Charm Communications, an ADR that is very volatile and small cap)
2) Are specialists required to buy stocks that are dropping so quickly that they are (appearing) soon to be delisted (like when FNMA went from the NYSE to the OTCBB)? In other words, are specialists ALWAYS required to buy the stock?
Thanks for the uninformative, hostile answer. This is a specialist.
I never said Charm Communications was freefalling, I used it as an example being that is a small cap, low volume, ADR stock. I own none of their stock. I was wondering if there was a specialist for this. Being that you are unaware of what a specialist even is, you're obviously of absolutely no help. I'm not sure if you're uninformed or just an asshole, but thanks for wasting my time.
- underexposed...Lv 76 years agoFavorite Answer
No one is REQUIRED to buy anything...this is not a charity....if you purchased a risky stock there is no safety net to catch you when you fail.
what are you talking about wrt Charm Communications???
it has not been in freefall all year...it has had its ups/downs but freefall...you ain't seen freefall if you think this is it.
I have a feeling that you bought this at $4.75 and watched it drop to where it is at $4.30 and are scared it will suddenly drop further....(which frankly it might do...)
from the looks of it Charm Comm is deciding that it wants to go private and there is a proposal to buyout all public shares....how that applies to ADR's I don't know.
Same thing with FNMA... a ton of people lost a ton of money when that fell from the sky in 2008...there was NO "specialist" with BILLION's to buy out everyone....they if they did exist were too busy trying to save themselves
Look.....there are not a group of "specialists" as you call them, that sit around and say...ok...we will rescue this guy or that guy or a whole bunch of guys from a bad investment decision.
You are playing with the big boys....learn how to make good investment decisions....this is not a video game where you get 3 lives or a simulation or a charity..
- DavidLv 76 years ago
What you're really asking about is liquidity risk, not necessarily how many specialists or market makers are assigned to the stock. NASDAQ requires at least two market makers per stock, but that doesn't necessarily provide more liquidity. They are required to make a market, not buy your stock.
It is safer to invest in liquid assets than illiquid ones because it is easier for an investor to get their money out of the investment. Liquidity risk is typically reflected in unusually wide bid-ask spreads or large price movements (especially to the downside).
Market liquidity risk can occur with any stock, even the largest of the Blue Chips, whenever everyone is on the same side, but usually occurs on the sell side. It merely causes price momentum to skyrocket, whichever direction. If the marketplace is in free-fall and has withdrawn buyers, this is called exogenous liquidity risk
The aftermath of the 9/11 attacks and the 2008 credit crisis are two relatively recent examples of times when liquidity risk rose to abnormally high levels.
The May, 2010 Flash Crash is a good example. Stops are getting hit and panicky investors try to sell their holdings at any price, causing widening bid-ask spreads and large price declines, which further contribute to market illiquidity and so on. In the throes of a "fast market," nobody can determine the true market price. Since you can't tell what the market price is, you can't very well enter a limit order, or you can guess. Entering a market order in a fast market is a license to steal, kill and rape the seller. In the case of an illiquid stock to begin with, it would probably be better to hold the stock and see how it shakes out.
The complaints from the Flash Crash were NOT that their stocks didn't sell, but the horrible prices they received. The specialists will do their job, count on that, and the stock will sell, but maybe at a penny. To be fair, the Flash Crash penny sales were busted if more than 30% off the opening price, but you probably wouldn't get that break in an isolated event of an illiquid stock. That's why traders don't trade illiquid stocks. Liquidity is the "a priori" of trading. If you're an investor, the question is moot. You shouldn't be selling in a free-fall at all, or put yourself in a position where you need to. It would be sorta dumb, an oxymoron, creating problems for yourself that shouldn't exist.