What to do if stock trading is abnormal? Learn more about the stock suspension system and investment risks

Have you ever paid attention to a certain stock and found that its short-term price movements are unusually volatile, with the price doubling within a month, yet suddenly unable to be traded smoothly like other stocks? This may indicate that the stock has been placed on a disposal list and that margin trading and short selling operations are restricted. What does this mechanism imply? How does it affect investors?

How Regulatory Authorities Respond to Abnormal Trading Phenomena

When a stock exhibits abnormal trading behavior, the Taiwan Stock Exchange adopts a stepwise regulatory approach. First, the exchange marks stocks with abnormal trading conditions, including large price swings within a short period, abnormal high turnover rates, or sudden increases in trading volume.

To understand the disposal stock system, we need to first understand its preliminary stage—Attention Stocks—which is an initial warning from the exchange about potential risks. When a stock reaches certain abnormal trading standards, such as a price increase of over 100% in 30 trading days, a daily turnover rate exceeding 10%, or an abnormal increase in trading volume over the past six days, it is classified as an Attention Stock. The key feature of Attention Stocks is that there are no trading restrictions; buying and selling are exactly the same as normal stocks, and investors can operate freely.

However, if the abnormal conditions of an Attention Stock persist, the exchange will take stronger measures, upgrading it to a Warning Stock and subsequently placing it on the disposal list. This process reflects a gradual risk control strategy by regulators.

Trading Mechanism and Operation of Disposal Stocks

Disposal stocks refer to stocks with obvious abnormal trading, which are placed on a special observation list by the exchange and subject to trading restrictions. Once on the disposal list, the stock’s trading volume and matching times are strictly regulated to calm the market and curb excessive speculation.

Disposal stocks are divided into two stages, each with different restrictions:

Stage One Disposal: During this phase, the matching time for trades is adjusted from continuous to every 5 minutes. When a single transaction exceeds 10 lots or accumulates over 30 lots, a circle deposit transaction is required. A circle deposit transaction means investors must pay in full, and the system automatically freezes the account funds to ensure payment capability, rather than delaying payment by 2 days (T+2) as with normal stocks. Additionally, margin trading and short selling are suspended, preventing borrowing and lending activities.

Stage Two Disposal: Applied if issues remain unresolved. The matching time is further extended to every 20 minutes, regardless of trading volume, and all trades are conducted via circle deposit. These measures significantly reduce liquidity, often causing trading volume to plummet.

The disposal period typically lasts for 10 trading days. However, if during this period, the proportion of same-day offsetting transactions exceeds 60% of total daily volume, the disposal period is extended to 12 trading days. After the disposal period ends, the stock is removed from the disposal list, and trading restrictions are lifted.

Key Differences Between Normal Stocks, Attention Stocks, and Disposal Stocks

The evolution of a stock from normal to abnormal generally follows a specific trajectory:

Post-Disposal Performance Is Difficult to Predict

Once a stock is placed on the disposal list, its subsequent trend depends on multiple factors; different stocks may show completely opposite results.

For example, Hengda Electronics (6756) was placed on the disposal list in June 2021, experienced first and second disposal phases, but showed strong resilience, with a total increase of 24%, eventually removing restrictions successfully. In contrast, Yang Ming (2609), similarly flagged due to large gains, was later re-entered into the second disposal phase after a significant decline, and has performed poorly over the long term.

These cases illustrate that being on the disposal list does not determine a stock’s future trajectory; it depends on the company’s fundamentals, market environment, and capital structure.

When a stock is classified as a disposal stock, trading volume usually shrinks significantly due to matching restrictions and higher payment requirements, leading to poor liquidity. In such cases, short-term traders face higher costs, and generally, it is not recommended to intervene when the overall market is performing well.

However, there is a popular saying in the market: “Disposal stocks tend to rise sharply after restrictions are lifted,” implying that restricted stocks often present new upward opportunities post-unlock. The reason is that, after entering disposal, the chips (ownership interests) tend to stabilize, and low liquidity can filter out long-term genuine buyers. Once restrictions are lifted and liquidity recovers, these steadfast funds may push the stock price higher again. Caution is needed, though, as if the stock faces short-selling pressure during disposal, escaping becomes more difficult.

Investment Value Judgment of Disposal Stocks

Disposal stocks are merely a temporary abnormal trading state and do not reflect the company’s actual quality. If investors, through thorough research, believe the company still has investment value, they can buy or hold during the disposal period.

To evaluate whether disposal stocks are worth investing in, consider these two aspects:

Fundamental Analysis: Focuses on core business capabilities, market position, financial health, etc. Investors should review financial statements, paying attention to revenue growth, gross profit margin, net profit, and whether these indicators maintain a stable positive trend.

Capital Structure Analysis: Mainly concerns capital flow. During disposal, since margin trading and short selling are restricted, and trading is limited, the movement of institutional funds becomes more transparent. Investors can better observe the true intentions of major players.

In practice, before entering, ensure the stock price is in a sideways consolidation phase within the disposal period. If the price has already started to decline sharply, it’s better to avoid. Also, assess whether the current valuation is reasonable; if undervaluation is suspected, it may be an opportunity to position during the disposal period.

Is Disposal Stock Suitable for Long-term Holding?

The long-term investment value of disposal stocks varies depending on circumstances and requires comprehensive consideration:

Risk Assessment Dimension: Compared to normal stocks, disposal stocks are usually riskier. Abnormal trading behaviors may hide operational issues, financial crises, or other major risks. If the company has structural problems, long-term holding could entail significant risks.

Market Environment Dimension: Macroeconomic conditions and overall stock market trends also influence disposal stock performance. In a bear market, disposal stocks face greater pressure; in a bull market, they may present better opportunities.

Investor Characteristic Dimension: Investors with high risk tolerance who believe in the company’s fundamentals might consider holding stable disposal stocks long-term; those with lower risk appetite should be cautious.

It’s worth noting that for long-term investors, longer matching times and trading restrictions have limited impact. Instead, they can benefit from more timely access to the latest financial disclosures issued by regulators, aiding rational decision-making. Conversely, short-term traders are more affected due to inability to perform intraday trading.