Why are stock trades restricted? Understanding disposed shares and their investment opportunities

Have you ever bought a stock and found that you couldn’t trade it as freely as other stocks, with buy and sell orders often waiting a long time to be filled? This might mean that you are holding a Disposal Stock—a type of stock under special regulation by the exchange.

From an investor’s perspective, what does a Disposal Stock mean?

Disposal Stock simply refers to stocks that have been placed on a special regulatory list by the Taiwan Stock Exchange due to abnormal trading behavior. But what exactly constitutes “abnormal”? When a stock exhibits any of the following conditions within a short period, it may be added to the disposal list:

• Monthly price change exceeds 100%
• Daily turnover rate reaches over 10%
• Trading volume has shown abnormal amplification over the past 6 days
• Large and sustained trading amplitude over multiple days

Rather than calling disposal stocks “problem stocks,” it’s more accurate to see them as overheated stocks—stocks that are being cooled down due to excessive trading activity. The exchange implements these measures to increase trading difficulty, aiming to curb speculation and restore market rationality.

What stages does a stock go through before entering disposal status?

The process from normal to disposal is gradual, typically passing through these stages:

Normal Stock → Attention Stock → Warning Stock → Disposal Stock

Before a stock is classified as a disposal stock, it is first flagged as an “Attention Stock” for early warning. At this stage, trading restrictions are not yet imposed, and investors can still buy, sell, and margin trade normally. Only if the abnormal conditions persist or worsen will it escalate to a warning stock, and eventually be included in the disposal list.

What trading restrictions are imposed on disposal stocks?

Once a stock is designated as a disposal stock, the trading experience changes significantly. Restrictions are categorized into two levels depending on severity:

First Disposal (Less Severe)

• Matching Frequency: From real-time matching to once every 5 minutes
• Funding Method: For single transactions over 10 lots or cumulative over 30 lots, a pre-funding (full prepayment) method is required
• Margin Trading & Short Selling: Suspended
• Duration: Usually lasts for 10 trading days

Second Disposal (More Severe)

• Matching Frequency: Extended further to once every 20 minutes
• Funding Method: Regardless of trade size, all transactions must use pre-funding
• Margin Trading & Short Selling: Permanently prohibited
• Duration: Also 10 trading days, but if intra-day offset volume exceeds 60% of total volume, the period extends to 12 trading days

What is the result of these restrictions? Liquidity drops sharply. Many investors who wanted to exit quickly find it extremely difficult, and trading volume often shrinks dramatically.

How do disposal stocks differ from other abnormal stocks?

Taiwan’s stock market has three regulatory levels for abnormal trading, which are often confused:

Attention Stock: Serves as a warning; trading remains normal with no restrictions.

Warning Stock: Indicates confirmed abnormality, but trading methods are still unrestricted (sometimes a stock can be both warning and disposal at the same time).

Disposal Stock: The strictest level, not only warning of risk but also imposing actual trading restrictions.

Simple analogy: Attention Stock is a “red card warning,” Warning Stock is a “yellow card,” and Disposal Stock is a “ban on trading.”

Will stocks rise after being classified as disposal stocks?

This is a common concern among investors, but the answer is: it varies case by case, and no general rule applies.

Bullish example—Take WeiFeng Electronics (6756). In June 2021, it was classified as a disposal stock and even upgraded to second disposal status. Yet, during the disposal period, its stock price actually increased by 24%. The reason is that the prior enthusiasm and strong shareholder base helped stabilize the stock during disposal.

Bearish example—Yang Ming (2609) was also classified as a disposal stock during a period of excessive gains. In July, due to a “large decline over the past 6 days,” it was again placed on the disposal list. Afterwards, its stock performance remained sluggish.

Key difference? The former was driven by overheating during an uptrend, while the latter was due to excessive decline. This shows that the same “disposal” label can have very different underlying reasons, leading to very different future performance.

Is investing in disposal stocks worthwhile? What are the criteria?

When deciding whether to buy disposal stocks, investors should look beyond the label itself and analyze the stock’s fundamentals.

Check the fundamentals:

• Does the company have a competitive core business?
• How are revenue growth, gross margin, and net profit trending?
• Is the company’s financial health stable?
• Are there management issues or significant risks?

Disposal status does not reflect the quality of the company itself, only abnormal trading behavior. If thorough research suggests the company still has investment value, the disposal label might actually present a low-price entry opportunity.

Observe the shareholding structure:

• Is the main capital net buying or net selling?
• What is the trend among institutional investors?
• Is there continuous capital inflow during disposal?

Interestingly, because margin trading and short selling are restricted during disposal, the movement of major funds becomes more transparent—investors can more directly see the actions of big players, which can be advantageous.

Additional tips:

• Before buying, check if the stock price has been sideways during disposal; avoid if it’s starting to decline sharply.
• Assess whether the current valuation is reasonable; lower valuations increase the chance of gains.
• After the disposal period ends, watch for potential rebound opportunities.

Are disposal stocks suitable for long-term holding?

It depends on multiple factors:

Risk tolerance: Disposal stocks tend to be more volatile than normal stocks. If you have low risk appetite, be cautious. If you can accept large swings, these stocks of fundamentally sound companies might present opportunities.

Market environment: In a rising market with good macroeconomic conditions, holding disposal stocks may have higher potential; in a declining market, risks increase.

Investment horizon:

• Short-term investors suffer the most**—they cannot execute quick trades due to matching intervals, which are incompatible with fast-paced trading.
• Long-term investors are less affected—matching times and restrictions have minimal impact if holding for 10 months or more, and the forced disclosure of financials can even help better understand the company’s operations.

What happens to disposal stocks in the end?

Disposal status is not permanent. Most stocks are removed from the disposal list after 10 to 12 trading days, returning to normal trading.

According to data released by the Taiwan Stock Exchange in December 2023, stocks like Hengda, Lishan, Hongguang, and Huangchang were classified as disposal stocks during that month. Over time, the vast majority of these stocks tend to revert to normal.

Key point: when do they get removed? If the stock performs steadily or continues upward during disposal, once restrictions are lifted, the shareholding structure is relatively stable, and a new rally may follow—this is the essence of the market phenomenon often called “the bigger the pile, the bigger the tail.”

Conversely, if the stock is suppressed by short-sellers during disposal, it can be much harder for investors to exit.

Final conclusion

Disposal stock essentially represents a temporary abnormal trading state, reflecting market overheating rather than the company’s intrinsic quality. Investment decisions should be based on the company’s fundamentals and genuine market signals, not just the “disposal” label.

For patient long-term investors, disposal stocks may hide opportunities for mispricing; for short-term traders seeking quick gains, they are traps to avoid. Ultimately, the choice depends on your confidence in the company’s prospects and your personal risk preference.