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Making illiquidity pay


The next time somebody tells you all the odds are stacked against the individual investor, remind them of the liquidity discount. This is the tendency for hard-to-trade stocks to sell at reduced valuations - and it represents one of the biggest advantages individuals have over the large institutions that dominate trading on Wall Street.

One reason small-capitalization stocks have delivered higher long-term returns is their illiquidity. Getting out of a small stock in a hurry can mean taking a big haircut on the price especially if you are a fund manager trading thousands of shares at a time.

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