(2) Multiple Types Of Shares
It is one of the most critical & tricky ways to identify and avoid value traps in stocks. Some company are found to have more than one type of shares such as Class A shares & Class B shares.
They have the possibility of more advanced voting rights, more dividend as well as other special rights. These rights are usually not granted to common shareholders.
Small investors should be cautious enough for investing in organizations with two classes of stocks. It is particularly due to more focus on a particular category of stock that is owned by insiders or large investors.
Such companies often neglect interest of small investors by not paying attention to stock’s category that is largely owned by small investors.
(3) Stock Liquidity
It is one of the best & tricky ways to identify and avoid value traps in stocks. Absence of liquidity in a stock is a major sign of investment value traps.
Large funds and institutions such as mutual funds, hedge funds, and pension plans, etc. often prefer to invest in solid value stocks. These are usually trading at cheaper price rather than illiquid stocks trading at price below $10 or more.
Professional fund managers & analysts may also avoid picking stocks of companies with total annual sales for less than $1 billion, or that are unprofitable.
A company with smaller number of floating shares is unlikely to be picked by institutional investors. Thus, a quick rebound in stock price is very less likely.
Thus, equity investors should avoid investment in value traps on these criteria.
- Value Traps: Shutterstock