Liquidity Issues
In generating our reports, we use the list of stocks included in the Reuters database, which has over 8,000 issues. With such a large database, there will be a large number of stocks trading only a few shares a day. To help with the liquidity issue, we take the closing price and multiply it by the 50-day average of the daily volume and use $500,000 as the cut-off point. However, a stock that makes it though this filter, may not qualify the following day. Besides filtering out stocks with a 50-day average trading value of less than $500,000 a day, we also remove preferred shares from the list of potential candidates because most charting programs do not accept their symbols and because we believe common stocks make better trading vehicles. Why include preferred issues in our reports if subscribers cannot see them on a chart? Finally, we try to remove stocks that did not trade on the day the list was generated. That’s because they may have just been de-listed, or they may be having difficulty meeting the listing requirements of the stock exchange.
Our filtering procedure is intended only to reduce the number of higher-quality stocks that are displaced by stocks of much lower quality in our reports. It is not intended that it serve as a substitute for your own responsibility to check the daily and average volume of a stock before investing in it.