Will the disposed shares rise? Uncovering the investment opportunities and risks behind abnormal stock trading

When you discover a stock that has surged over 100% in the short term but suddenly cannot be traded as quickly as before, and margin trading and securities lending are restricted, it may indicate that the stock has entered a special trading state. Many investors wonder: Will these stocks rise after being restricted? Why are these limits imposed? What opportunities and risks are hidden behind these restrictions?

Why Are Stocks Placed Under Special Monitoring Restrictions?

Stocks under special monitoring are those exhibiting abnormal volatility within a certain period and are included in the Taiwan Stock Exchange’s watchlist. Phenomena such as rapid price swings, high turnover rates, and abnormal trading volumes trigger this standard.

The exchange imposes restrictions mainly to reduce trading heat and cool down the market. Specifically, stocks with abnormal trading activity are monitored at two levels: first flagged as “Attention Stocks” (no trading restrictions), and if abnormality persists, upgraded to “Disposal Stocks” (trading restrictions).

Once a stock is classified as a disposal stock, trading volume, matching frequency, and payment methods are strictly controlled. Based on the severity of the abnormality, restrictions are divided into “First Disposal” and “Second Disposal” phases:

First Disposal: Matching is limited to once every 5 minutes. If a single order exceeds 10 lots or cumulative orders exceed 30 lots, a circle trading (full payment immediately, not T+2 delayed payment) is required. Meanwhile, margin trading and securities lending functions are suspended.

Second Disposal: Restrictions are more severe, with matching limited to once every 20 minutes, and all trades—regardless of size—must use circle trading. These measures often cause trading volume to plummet and liquidity to deteriorate significantly.

Typically, the disposal period lasts for 10 trading days, but if intra-day offset volume exceeds 60%, the period extends to 12 days. Market data from late 2023 shows stocks like Evergrande, Lishan, Hongguang, and Huangchang have experienced disposal restrictions.

The Rise and Fall of Disposal Stocks Depends on Two Main Factors

Do disposal stocks go up? There’s no absolute answer, as performance varies greatly among stocks. For example, in 2021, WeiFeng Electronics (6756) saw a 24% increase during its disposal period, while Yang Ming (2609), after being classified as a disposal stock, soon fell sharply and was reclassified, with its stock price remaining weak afterward.

These cases highlight an important principle: The subsequent trend of disposal stocks depends on their fundamentals and capital dynamics.

From a fundamental perspective, investors should thoroughly analyze the company’s core business, market competitiveness, financial statements (especially revenue growth, gross profit margin, net profit), and whether financial trends are stable. These factors determine the company’s true value.

From a capital flow perspective, monitoring the inflow and outflow of funds is crucial. Since margin and securities lending are restricted during disposal, signals of institutional buying and selling become clearer, making it easier to interpret market intentions. Continuous buying indicates confidence, while large-scale selling may signal hidden risks.

There’s a saying in the market: “The more they restrict, the bigger the tail.” It refers to popular stocks under disposal that, during liquidity droughts, have relatively stable chips (ownership). Once restrictions are lifted, they may experience a new wave of gains. However, this scenario typically occurs when the company’s fundamentals remain sound and the market is optimistic. Conversely, if a stock faces short-selling pressure or drops sharply during disposal, exiting becomes much more difficult.

How to Assess Whether Disposal Stocks Are Worth Buying

Disposal status is merely a temporary trading anomaly label and does not reflect the company’s quality. If investors conduct solid research and believe in the company’s investment value, they can still consider entering during disposal.

To evaluate whether a disposal stock is worth buying, consider these aspects:

• Price Trend: Is the stock price consolidating sideways during disposal, or is it dropping sharply? Sideways movement often indicates stable chips and a safer entry point; sharp declines suggest market pessimism and should be avoided.

• Valuation Level: Compare the current valuation with industry averages and historical levels. If the stock is undervalued or trading at a low price, disposal periods may present good accumulation opportunities.

• Financial Reports: Monitor the latest financial disclosures. Regulatory agencies require disposal stocks to release updated financial statements, providing timely insights into operational health and reducing information asymmetry.

• Market Environment: When the overall market is in an uptrend and macroeconomic conditions are favorable, disposal stocks are more likely to rebound after restrictions are lifted; in bearish environments, risks increase.

Risks to Consider When Holding Disposal Stocks Long-Term

For investors aiming to hold disposal stocks long-term (buy-and-hold), several risks should be carefully evaluated:

• Underlying Company Issues: Abnormal trading often signals underlying problems—poor management, financial distress, or major adverse events. Compared to normal stocks, disposal stocks carry higher risk exposure.

• Investor’s Risk Tolerance: Disposal stocks tend to be highly volatile. Investors with low risk tolerance or seeking stable portfolios may find them unsuitable. Conversely, those comfortable with large swings and optimistic about the company’s prospects might benefit from long-term holding.

• Impact of Trading Restrictions: Short-term traders are significantly affected by the inability to day trade or short-sell. Long-term investors, however, are less impacted and may even benefit from the stability of chips during restrictions.

• Market Conditions: In a booming economy and rising stock market, disposal stocks often perform better; during downturns or bear markets, their downside risk is amplified.

Overall, investing in disposal stocks does not have a one-size-fits-all answer. The key is to focus on the company’s fundamentals, conduct thorough analysis, and track capital flows to make informed decisions rather than blindly follow trends or avoid them altogether. Disposal stocks are essentially trading tools; the real determinants of success are investors’ understanding of the company and their risk management capabilities.