Sep 18, 2014

    Higher-priced stocks are more liquid: Study

    STOCKS on the Singapore Exchange (SGX) trading at 25 Singapore cents and higher are more liquid as investors are drawn to invest in them given their lower implicit trading costs, according to a recent study by the Singapore Exchange.

    Based on the study, just under half or 371 stocks of the total 736 listed on SGX last year belonged to this price band based on their annual volume-weighted average price, while 188 stocks were worth less than 10 Singapore cents.

    The report, which examined the link between the quality or liquidity of Singapore-listed stocks and the stock price based on last year's data, echoed the findings of studies done in other markets that the higher the stock price, the better the liquidity.

    Even so, the report discovered that stocks trading at less than five Singapore cents - there were 80 such counters - also had similar liquidity as those worth 25 Singapore cents and above.

    On the other hand, stocks worth between five Singapore cents and less than 25 Singapore cents were less liquid as they didn't have the "desired market quality", hence had higher implicit trading cost for investors.

    Apart from price, a stock was found to be more liquid if it is accompanied by higher market capitalisation or showed strong company fundamentals.

    The SGX study used two benchmarks to measure liquidity: the traditional and more commonly used gauge which is the bid-ask spreads and quoted best depth, which examines the best bid and ask prices.

    In a nutshell, the study found that a higher priced stock has a lower bid-ask spread and higher market depth which, more importantly for the investor, means lower trading cost.

    "A lower implicit trading cost ensures that investors will achieve a better quality of execution, which points to a higher quality market," said the study.

    The correlation doesn't stop there - higher priced stocks record a higher proportion of traded value and market capitalisation.

    Cementing this notion is data which shows that stocks trading at 50 Singapore cents or higher made up just over 80 per cent and 92 per cent of the market's total traded value and total market capitalisation last year, respectively.

    Furthermore, stocks priced at $1 or greater traded every day throughout the year unlike the lower-priced counters which found themselves snubbed by investors over some trading days of the year.

    The report also highlighted a major difference between the local market and American and European stock markets.

    "The minimum quantity for the majority of stocks traded on SGX is 1,000 shares. This is significantly different to other global markets where the minimum trading quantity is usually one share," it said.

    That is set to change from Jan 19 next year when retail investors will be able buy stocks in smaller lots of 100 units, a move aimed at wooing investors to pick up blue-chips which tend to be higher-priced.