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Low volumes, high returns

Even though many companies with a low daily trading volume have managed to reward their investors with high returns, one should be cautious while investing in such companies.

Low volumes, high returns

There is a very common belief that 'less is more,' which means that fewer things are always better than more of them. No doubt, it may hold true in many cases like less spending will leave you with more money and so on. Here, we have decided to apply this principle to our stock filters and checked companies having a very less average daily trading volume but generating far more returns than the broader market.

The following list states all those companies that have witnessed a daily average trading volume of less than 20,000, which is less than 1 per cent of the average-traded volume of stocks with a market capitalisation of at least Rs 1,000 crore.

Although these companies have been able to deliver great rewards to their investors, higher returns have come with higher risk. A very low trading volume has its own merits and demerits. For example, a stock may have a low trading volume, as the company may not be very widely known or its investors' interest and coverage are less. At times, it may be the case that investors think that the stock is so good that they don't wish to sell it. And if there is no seller, then the volume would automatically be low. Such types of stocks could also trade at very high valuations. A case in point is Tasty Bites, which trades at a P/E of 92 times and has rewarded its investors with a return of more than 50 per cent CAGR in the last 10 years. Also, there may be a case that the share price of a particular stock is so high that it makes it difficult for retail investors to buy that security. For example, the share price of MRF trades close to Rs 78,000 per share, which may not be feasible for all investors to buy, thus resulting in a low volume.

However, several risks are also associated with low-volume stocks. Owing to the low volume, these stocks lack liquidity. So even if an investor earns a profit on the security, it would be difficult for him to realise the gain, as there is no buyer. Lack of liquidity makes it easy for operators to manipulate the stock price of the security. Thus, instead of considering the high returns of these stocks, one should make in-depth research before investing in low-volume securities.