If you’ve recently started learning about the stock market in India, you may have come across the term illiquid stocks. Many beginners get confused about what are the illiquid stocks, why they are risky, and how to identify them before investing. Illiquid stocks are often cheap, but they can be extremely dangerous if you don’t understand how they work. In this guide, you’ll learn everything about illiquid stocks in a simple, friendly, and practical way so you can avoid costly mistakes.
What Are Illiquid Stocks?
Illiquid stocks are shares that cannot be bought or sold easily because there are very few buyers and sellers in the market.
In simple words:
Illiquid stocks = Low trading activity + Difficult to buy or sell quickly
If you place an order, it may take minutes, hours, or even days to get executed. Sometimes, the order might not execute at all.
To understand what is considered an illiquid stock, look at stocks that trade with:
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Very low daily trading volume
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Very few buy/sell orders
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Wide price gaps
These stocks are usually small-company stocks, penny stocks, or companies with very low investor interest. This is what makes a stock illiquid — lack of consistent trading activity and low investor demand.
How Illiquid Stocks Work?
Illiquid stocks move differently from liquid stocks.
Let’s understand this with a simple example.
Imagine you want to buy 2,000 shares of a company.
But in the market, sellers are offering only 150 shares at the current price.
This means your order will not fully execute.
You may need to pay a higher price for the remaining shares, because the next seller is quoting a much higher rate.
This is also why the bid-ask spread is much wider in illiquid stocks.
Realistic scenario:
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Buyers want: ₹50
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Sellers want: ₹70
Difference = ₹20 (very wide spread)
This gap shows low liquidity.
A liquid stock may have a spread of just ₹0.10–₹0.50.
Some investors also confuse illiquid stocks with derivatives. When discussing what are illiquid options, the concept is the same — very low trading interest in certain option contracts, making them hard to exit.
Step-by-Step Guide: How to Identify Illiquid Stocks
Here is a simple way to identify whether a stock is liquid or illiquid before you invest.
Step 1: Check Daily Trading Volume
If a stock trades fewer than 5,000–10,000 shares a day, it is likely illiquid.
Low volume = difficult to enter and exit.
In India, most illiquid stocks have almost zero buyers at certain times of the day.
Step 2: Look at Bid-Ask Spread
Bid price = What buyers want
Ask price = What sellers want
If the gap is too wide (₹5, ₹10, ₹20 difference), the stock is illiquid.
A wide spread is a red flag and shows what makes a stock illiquid.
Step 3: Check Market Depth
Market depth shows how many shares are available to buy or sell at different prices.
Signs of illiquidity:
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Very few entries on the order book
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Very small quantities (like 20, 30, 50 shares)
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No buyers for long periods
Step 4: Check Delivery Percentage
If delivery percentage is extremely low (below 15–20%), it means investors are not taking actual ownership of shares.
This can be a sign of manipulation or low trust.
Step 5: Look at Price Chart
Illiquid stocks show:
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Sharp, irregular movements
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Big price jumps with small trades
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Long periods with no price movement
This is typical of what is considered an illiquid stock.
Examples of Illiquid Stocks and Situations
Illiquid stocks do not always belong to bad companies. Many fall into this category because of lower investor interest or niche operations. Below are common examples:
Example 1: Very Small Companies
Micro-cap companies often have low volume.
Even if they have potential, traders avoid them because of high execution risk.
Example 2: Companies Facing Uncertainty
If a company is in financial trouble or losing business, investors stop trading it, making it illiquid.
Example 3: Niche Sector Companies
Stocks from very specialized industries may have fewer investors.
Thus, buying or selling large quantities becomes difficult.
Example 4: Illiquid Stock Options
Illiquid derivatives are also common.
If you want to understand what are illiquid stock options, here’s a simple explanation:
These are options contracts (calls or puts) that have:
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Almost no trading
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Very low open interest
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Huge bid-ask spreads
Traders get stuck because no one is willing to buy back the option at a fair price.
Benefits of Understanding Illiquid Stocks
Knowing what are the illiquid stocks helps you avoid major investing mistakes. Here are some benefits:
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You avoid getting stuck with shares you cannot sell
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Prevents loss from unfair pricing
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Helps protect beginners from risky small-cap traps
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Helps in building a stronger, safer portfolio
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Teaches you how liquidity affects price movements
Many investors who don’t understand liquidity end up in bad trades. Awareness protects you.
Risks and Mistakes Beginners Should Avoid
Illiquid stocks are extremely risky, especially for new investors. Here are the biggest dangers:
1. Getting Stuck
You may buy a stock, but when you try to sell — no buyers.
2. Manipulated Prices
Low-volume stocks are easily manipulated.
3. No Fair Price
You may be forced to sell at a huge loss due to low liquidity.
4. Big Bid-Ask Loss
You lose money immediately due to the large price gap.
5. Very High Volatility
A single buyer or seller can move the price dramatically.
6. Market Orders Become Dangerous
Beginners using market orders often get terrible prices.
When you understand these risks, you become more careful and better at evaluating what makes a stock illiquid.
Best Tips to Avoid Illiquid Stocks
Here are practical, beginner-friendly tips:
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Avoid stocks with tiny daily volume
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Always check bid-ask spread before buying
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Prefer Nifty 50, Sensex, and large-cap stocks
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Use limit orders instead of market orders
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Avoid stocks trading below ₹10 unless fundamentally strong
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Avoid unknown companies with little information
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Do not buy a stock just because it is “cheap”
These tips help safeguard your portfolio from hidden risks.
Comparison Table: Liquid vs Illiquid Stocks
| Feature | Liquid Stocks | Illiquid Stocks |
|---|---|---|
| Trading Volume | High | Very Low |
| Order Execution | Fast | Slow or Pending |
| Bid-Ask Spread | Tight | Wide |
| Price Stability | More stable | Highly volatile |
| Risk Level | Lower | High |
| Suitable For | Everyone | Experienced investors only |
| Examples | Large-cap stocks | Micro-caps with low volume |
This table helps beginners clearly understand what is considered an illiquid stock.
Conclusion
Understanding what are the illiquid stocks is extremely important for every beginner in the Indian stock market. Illiquid stocks have low trading volume, wide bid-ask spreads, and very few buyers or sellers, making them risky and difficult to exit. While they may look attractive due to low prices, they often trap investors and lead to losses. Always check liquidity, volume, and market depth before investing. Knowing how to spot illiquid stocks helps you protect your money and make safer investment choices.
FAQs: What Are the Illiquid Stocks?
1. What are the illiquid stocks in simple words?
Stocks that cannot be bought or sold quickly due to low trading activity.
2. What makes a stock illiquid in India?
Low volume, lack of buyers, wide bid-ask spread, and low investor interest.
3. What is considered an illiquid stock?
Any stock with very little trading and poor order book depth.
4. Why are some stocks illiquid even if they are cheap?
Low trust, poor performance, or lack of investors can make them illiquid.
5. What are illiquid stock options?
Options with low open interest and almost no trading — difficult to exit.
6. Are illiquid stocks risky for beginners?
Yes. Beginners can get stuck or face large losses.
7. How do I check if a stock is illiquid?
Look at daily volume, market depth, and bid-ask spread.
8. Can illiquid stocks become liquid again?
Yes, if the company grows or investor interest increases.
9. Should beginners invest in penny stocks?
Generally no, because many penny stocks are illiquid and risky.
10. What are illiquid options in trading?
Options contracts where there are not enough traders, making exit difficult.
11. Is low price a sign of illiquidity?
Not always, but many low-priced stocks are illiquid.
12. How can I avoid illiquid stocks?
Stick to well-known, actively traded, fundamentally strong companies.
