High volume, high risk

WELCOME to the stock market party.

The trading volume in shares on Bursa Malaysia has been trending upwards since July and peaked at 4.3 billion shares on Thursday, the highest since early April when volume was at 5.2 billion shares.

Interestingly, much of that activity is concentrated on the small-cap stocks, as the value of shares traded on Bursa Malaysia has been basically up on a slight gradient but the FBM KLCI between July and yesterday was down from 1,763 to 1,755.

Rotational plays have always been a feature on stock markets. Big caps will often move, followed eventually by the small-cap stocks. But anecdotal evidence will show that when small-caps start to basically be the focus of trading activity, with a number of counters moving up like they have bounced off a trampoline, it is then that investors need to get a bit cautious.

Whichever way investors and punters cut it, share prices over the long term have always boiled down to profit and earnings. Dividends ensure sustainability of a counter’s appeal to longer-term investors, but like all stock markets, speculation is something that will always feature in a market.

A healthy dose of speculation is good. It drives interest in stocks, but wild spikes of counters that have flatlined for a long time should be nothing more than a surge in trading activity.

Those who have been watching markets in the past will point to periods when a wild party in small-cap stocks often is a prelude to something not so savoury for the stock market. Investors should know that jumps in valuations of many small companies that have never performed financially in the past are mostly never sustainable.

Some do turn the corner, but for most, it is just a wave of trading activity.