Price volatility is what enables winning trades to be made. Therefore a stock like AIQ (LON: AIQ) and a stock which should not be confused with the AIQ ticker in the US markets, should be of interest. For the price bounces around on not much news or obvious action. Of course, it’s necessary to be on the right side of any such price moves in order to profit but that first requirement of price volatility is there.
The price was 11.50 in the summer (in pence), fell to 5.50, jumped to 22/00 and yesterday declined that 18% to the current quotation of 12.50. Volatility, that traders’ friend.
The business itself is somewhere between a SPAC and a rollup. The company existed on the stock exchange before it did very much, has acquired a business in SE Asia, and is looking for more. It’s small-scale stuff, as rollups generally are at the start. Part of the point is to acquire smaller organisations that can then benefit from being part of a larger scale group. That’s what makes this different from a straight SPAC where the aim is just to ease onto the market an already organised business.
However, while price volatility is an essential prerequisite for a trading strategy it’s not a sufficient one. We also have to look at liquidity and its corollary, the spread.
Market prices are quoted at the mid-price. So, to take the AIQ price yesterday, that was quoted at 12.5. That’s fine, that’s just how the system works. But that is the mid-price and AIQ is a pretty small company – perhaps £9 million in total value. This means there’s not much liquidity in the stock, there aren’t all that many people buying and selling. That, in turn, means that the spread is large.
In large and liquid stocks it is possible, sometimes at least, to buy and sell at the same price. Perhaps not to and from the same person, but among all those in the market. The more illiquid a stock the less likely this is. Which leads to situations like AIQ and its spread. The buying price is 15 (at that 12.50 mid-price) and the selling price is 10.
That means if we’re trying to ride the price down then we’ve got to get a 33% fall in the stock price before we’ve even covered the costs of dealing. Or, if we’re looking to ride it up we need a 50% price rise just to break even after costs and spread.
Of course, AIQ has shown that sort of price volatility as we can see above. But trading in stocks with such wide spreads does make coming out ahead – that aim of making a profit – more difficult. The wider the spread the more extreme the price movement required before we even come out evens.
Prices matter, of course they do, price volatility is the lifeblood of a trading opportunity. But we need to be aware of and careful about trading spreads as well. For the wider the spread the larger the price movement required before we can book a profit.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.