Important to see for abnormal stock trading: The truth about disposed stocks and investment opportunities

When you are optimistic about a certain stock and decide to enter the market, you suddenly find it listed as a “disposal stock” — trading becomes more difficult, financing and margin trading are halted, and trade matching times are extended. What exactly is going on? Can you still trade disposal stocks?

Why Do Disposal Stocks Appear? The Logic Behind Abnormal Trading

Disposal stocks are essentially a risk control mechanism implemented by regulatory authorities. When a stock exhibits abnormal trading behavior in the short term — including excessive price swings, unusually high turnover rates, or sudden surges in trading volume — the Taiwan Stock Exchange will impose temporary restrictions.

The process is gradual, not immediate. Stocks are usually first flagged as “Attention Stocks” as a warning, with no trading restrictions at this stage. If abnormal trading continues, the stock is upgraded to “Warning Stocks,” and eventually, it enters the “Disposal Stock” phase, where trading restrictions are fully enforced.

From actual data, in December 2023 alone, over ten stocks on the Taiwan Exchange entered the disposal list simultaneously, including Evergrande, Lishan, and Hongguang, indicating that such situations are not rare.

The Three Stages of Trading Restrictions for Disposal Stocks

Once a stock is listed as a disposal stock, it faces different levels of trading constraints depending on the severity of the abnormality.

The first stage of disposal has relatively mild restrictions: trade matching times are extended to every 5 minutes, and trades exceeding 10 lots or a total of over 30 lots require “pre-placed orders” (full pre-locked funds). Margin trading and short selling are suspended. This contrasts sharply with normal stocks, which follow the T+2 settlement.

If these measures do not curb the abnormal volatility, the stock moves into the second stage of disposal — matching times are extended to every 20 minutes, and all trades, regardless of size, must use pre-placed orders. This significantly reduces trading volume and liquidity.

Typically, the disposal period lasts for 10 trading days, but if the proportion of intraday offset trades exceeds 60%, the period extends to 12 trading days. After the period ends, restrictions are lifted.

Comparison of Restrictions

Why Do Some Say “Disposal Stocks Keep Rising the More They Are Restricted”?

There is a common belief that “disposal stocks tend to surge more the longer they are restricted,” and there is some logic behind this.

Many stocks that are flagged as disposal stocks are often hot stocks with strong upward momentum beforehand. Once in the disposal phase, due to increased trading difficulty and reduced liquidity, retail investors find it harder to enter, while institutional funds’ movements become more transparent and easier to track. After restrictions are lifted, the accumulated positions can trigger a new wave of upward movement.

However, this logic is not always consistent. For example, Wifon Electronics (6756) entered disposal status in 2021, went through first and second disposal phases, and ultimately gained 24% in stock price. Conversely, Yang Ming (2609), also flagged for large gains, faced a different outcome — after being flagged, it experienced a “cumulative decline over the past 6 days,” and its stock price remained sluggish long-term.

This reminds us of an important fact: the subsequent trend of disposal stocks varies by individual stock, and there is no absolute rule.

How to Assess the Investment Value of Disposal Stocks?

Being flagged as a disposal stock does not mean the company itself has problems — it is merely a temporary label for abnormal trading conditions. Genuine investment decisions should focus on the company’s fundamentals.

Fundamental analysis is key. Investors need to thoroughly understand the core business, product competitiveness, financial health (such as revenue growth, gross profit margin, net profit), and determine whether the stock has long-term investment potential. If the company is well-managed and financially sound, the disposal status is just a temporary obstacle.

The chip (ownership) aspect offers another perspective. During disposal periods, since margin trading and short selling are suspended, the buying and selling activities of major players become more transparent. Investors can observe large trades to gauge whether institutional funds are accumulating or exiting.

Risk reminder: Before buying, ensure the stock price during the disposal period is in a sideways consolidation. If there is a clear downward trend, avoid entering. Also, verify whether the current valuation is reasonable — if the stock is truly undervalued, taking advantage of lower liquidity might actually present an opportunity.

Differentiated Considerations for Short-term and Long-term Investors

For short-term traders, disposal stocks can have a significant impact. The inability to day trade, longer matching times, and higher transaction costs weaken the effectiveness of short-term strategies.

For long-term investors, the impact is relatively limited. Longer matching times and trading restrictions do not significantly affect long-term holdings. Moreover, regulatory requirements may compel disposal companies to release financial information more frequently, helping investors stay updated on corporate developments.

Conditions for holding disposal stocks long-term:

1. The company’s fundamentals are stable, with no major operational or financial risks.
2. The overall stock market environment is friendly, and macroeconomic conditions are not in a clear downturn.
3. The investor has a high risk tolerance and can accept short-term volatility.
4. The investor has confidence in the company’s long-term prospects, viewing the disposal status as temporary.

If these conditions are not fully met, exercise caution.

Final Recommendations

Disposal stocks are not forbidden zones, but they are not speculative playgrounds either. They are a reasonable regulatory response to abnormal trading behaviors, aimed at protecting market order and investor interests.

When deciding whether to invest in disposal stocks, ask yourself three questions: Is the company’s fundamental worth investing in? Is the current valuation attractive? Do I have enough patience and risk capacity to endure liquidity constraints?

Only when all three answers are yes is it an appropriate time to consider entering.