To make proper investments, we need to understand investments in detail. In this article, we look at one investment, active stocks.
Understanding active stocks
A stock represents partial ownership in a company listed on a stock exchange. However, stocks can be classified into various types. Active stock is one type.
Active stocks have the same features as any other common stock, except they are heavily traded daily. Let’s understand why these stocks are important from an investor’s perspective.
What are active stocks?
Stocks bought and sold in large numbers daily are known as active stocks. These stocks generally have huge trading volume and low bid-ask spread. Often, these stocks belong to blue-chip companies or those that are part of an index like Nifty or Sensex, but this is not an exclusive feature. Companies with many outstanding shares are often part of this stock list.
Having many shares available for trading allows an investor to trade easily. There is no yardstick or fixed parameter to decide which stock can be classified as active. But you can identify them by looking at the average trading volume and price fluctuations. Financial websites also post a list of the most active stocks daily.
How are these stocks different from passive stocks?
Unlike these stocks, which are frequently bought and sold and have a huge trading volume, passive stocks have a low trading volume. The price of passive stocks changes only a few times or even once during the entire day-trading period. Here are some key differences between these two types of stocks:
|Parameters||Active Stocks||Passive Stocks|
|Trading Volume||High average trading volume and low bid-ask spread||Low average trading volume and high bid-ask spread|
|Ease of Trading||Can be bought and sold easily due to high liquidity||Entering and exiting is difficult due to low liquidity|
|Stock Manipulation||Not possible because of large volumes||Can be manipulated as a single large buying or selling order can drive the price significantly up or down|
|Intraday Trading||Intraday traders prefer them as entry and exit are fairly simple||Not a good option for intraday trading because the price moves relatively little|
|Investment Duration||Can be invested for the short and long terms||Long-term is preferable with passive stocks|
Advantages and disadvantages of investing in active stocks
Like any other investment option, investing in these stocks has its own set of advantages and disadvantages. Just because stocks have a large trading volume, it does not mean they are good investments. In this section, let’s look at the advantages and disadvantages of active stocks.
1. These stocks allow more flexibility for traders by providing easy entry and exit points. Intraday traders want liquidity and leverage, and active stocks offer both.
2. With large volumes, there may be big returns even if there is little price movement. If you miss a good entry point, you can always look for another, as bid and ask prices are not often significantly different.
3. A listed company receiving big orders, tenders, and/or good profit reports can increase prices.
4. With active stocks, you can determine the market sentiment and align your trading strategy accordingly.
1. Not all active stocks are worth an investment. Remember to factor in a company’s financials and business model before deciding.
2. Some penny stocks could also have big trading volumes, so be careful while choosing stocks.
3. Active stocks may look lucrative because of easy entry and exit points. But investors should use technical indicators and other available tools because a trade can always go sideways.
Key considerations for investing in active stocks
Every prudent investor should consider multiple factors before investing. These stocks have their merits and are often considered a good option, but consider some important considerations before investing.
1. Investors should know well about a company’s financial health, business model, revenue model, recent performance, etc.
2. Companies on the active stocks list do not always have a solid business model.
3. Several active stocks could be available for trading, but traders should choose what they understand.
4. Internal and external factors can affect active stock prices, so thoroughly research before investing.
5. It makes sense to have a good grasp of market sentiment. Because, in the short term, the market moves based on the prevailing sentiment.
Finding the right active stocks for your investment portfolio
Each investor has his/her own set of rules when deciding which stock to include in their portfolio. But all investors want a stock that has sufficient liquidity. So you can consider the following steps while choosing an active stock for your portfolio:
1. Ensure you understand the industry or the sector to which a particular active stock belongs.
2. Check whether the active stock you are considering diversifies your portfolio.
3. Assess how much active stock is owned by promoters, institutional investors, and common shareholders.
4. Study the market and look for any crucial recent event that could affect the price.
5. The official website of the National Stock Exchange posts a list of the 20 most active stocks based on volume and price movement daily. Check out this list to start with.
Investors generally prefer active stocks because of the high liquidity and trading volume. However, investors should also study them in detail like any other investment. It is also advisable for investors to monitor events that could affect the prices of this type of stock.