My 1st post as a newcomer to Stockopedia. Interested in views on what is a reasonable spread when investing in small caps? >5% puts me off or are large spreads just a fact of life and and a downside of investing in smaller companies? Any thoughts appreciated!
I would avoid north of 5% as your looking at 10% plus on a round trip buying and selling, each to their own but these days I generally fish in mid caps and upwards with max spread of 1.5% each way.
I try to avoid anything over 5%. Trouble is spreads can get wider on bad news, can be difficult to get out. If you time it right you can sometimes buy when the spread is narrower. I have bought some below the mid price.
You would have to be very sure of the investment case to warrant such spreads. If you are new to investing you might want to consider more liquid stocks and bat your way in to something more risky.
Iliquid stocks with wide spreads can burn private investors in many ways above and beyond the obvious problem of the spread itself.
I agree with others here, avoid anything with 5% spread or greater. Also, pay attention to the daily volume of shares, this will tell you whether you can get in and out with (relative) ease. There is a lot of upside with these shares, UK small caps with 95+ momentum rank, rebalanced quarterly has produced c.20% compounded annualised rate of return (before spreads and fees). However, in practice, you will want to take off a few percentage points, even with a zero commission broker.
If you want decent returns and liquid shares, then I would suggest trading mid-caps (e.g. AIM 50 and FTSE 250). Historically, the 95+ momentum rank has produced c.14% annualised + 2.5% dividend yield.
Naked Trader by Robbie Burns (brilliant book for beginners and a good book to remind more experienced investors of sensible habits) says you need to have a good reason to pay a spread greater than 3%. Avoid anything north of 4%. As per others below, wider the spread, the more a share tends to be illiquid and therefore difficult to trade in and out of. Hope this is useful.
SSB
If you think it looks good buy it. Others will if the investment case is good. I bought Dalata Hotel (LON:DAL) on a wide spread- but is up 25%. Normally you can put a limit buy/sell order with your platform.
