High vol­ume, high risk

The Star Malaysia - StarBiz - - Short Position -

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.

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