Introduction

• In 2013, SEBI (Securities and Exchange Board of India) introduced the periodic call auction.
• The key motive behind the step was to reduce volatility in illiquid stocks.
• As per the SEBI guidelines, illiquid stocks have an average daily trade below 50.
• Also, their trading volume is less than 10,000, among other conditions.

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What is the Periodic Call Auction Mechanism?

• In the periodic call auction, beginning at 9:30 AM and operating similarly to pre-market equity stock sessions, six auction sessions of an hour each are conducted throughout each trading day.
• Participants are given 45 minutes to put, modify, or cancel orders. After that, all received orders are matched within eight minutes, and then trade confirmation takes place. Also, there is a seven-minute buffer before the commencement of another call auction session.
• Periodic call auctions provide an organised and controlled trading environment for illiquid stocks. They help guarantee fair price discovery while decreasing excessive volatility.

• If you plan to purchase or sell illiquid stocks subject to periodic call auctions, orders should be placed within 45 minutes and executed if your bid matches within eight minutes.

A Closer Look at Illiquid Stocks

• Illiquid stocks refer to securities that cannot be easily converted to cash, making trading difficult or impossible.
• Finding someone willing to buy or sell at a fair price makes trading impossible. Thus, illiquid stocks have lower values than liquid ones.
• These stocks may be risky investments because it can be challenging to manage their risks. However, they could offer high returns should the fortunes of their company improve.
• Illiquid stocks are unpopular with investors because of their risk-prone nature.
• For instance, in an emergency scenario requiring fast selling for emergency expenses, you may not find buyers willing to accept your price quickly enough.
• So, it's important that investors carefully consider all their options when investing in these types of investments.
• However, there are a few advantages as well. Owners of illiquid stocks may benefit from purchasing shares at a discount due to the fewer buyers and sellers on the market.
• This makes it possible to buy it at prices lower than its true worth. Investors can then potentially gain from any increase in price over time.

Conclusion

• Now that you know what a periodic call auction is and what shares fall under this category, you must consider investing wisely. Illiquid stocks are publicly traded companies' shares.
• Yet, as stated earlier, illiquid stocks can't be liquidated easily.
• However, they have the potential to offer greater returns. Hence, invest wisely after considering all the pros and cons and your risk tolerance.

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