Stocks suddenly become untradeable? This might be due to entering the "Trading Restricted Zone"

Have you ever experienced this kind of embarrassment? The stocks you’re optimistic about are skyrocketing, doubling in just one month, and you’re thinking about jumping in to share the gains. But when you place an order, you find the transaction is painfully slow, and your margin trading and securities lending are frozen. Even more absurd is that all your friends trading stocks can execute smoothly, only your orders are “stuck.” At this point, don’t rush to sell off your holdings; it’s very likely that your target has already been included in the Taiwan Stock Exchange’s special monitoring list—that is, the market’s so-called stocks subject to disposal can be bought, but buying is not smooth.

Abnormal trading will lead to “confinement”

What are disposal stocks? Simply put, they are stocks exhibiting abnormal trading behavior and have been placed on the Taiwan Stock Exchange’s “Observation List.” The definition of abnormality is broad: short-term skyrocketing or plunging, sudden surge in trading volume, or an extremely high turnover rate—all these can trigger regulatory alerts.

The Taiwan Stock Exchange adopts a “graded warning” system, similar to a “traffic light system” for stocks. Stocks first enter the “Attention Stock” stage, which is a yellow light—investors are warned of risks, but trading methods remain unchanged. If the stock continues to act up during the Attention stage and meets abnormal standards for several consecutive trading days, it will be upgraded to a “Warning Stock,” and ultimately enter the “disposal stock” red light zone.

Once a stock is on the disposal list, trading methods are significantly altered. Compared to normal stocks, disposal stocks can be bought, but restrictions are almost like being in prison.

Two levels of disposal, different restriction intensities

After entering the disposal list, regulators further classify the stocks into two levels based on the severity of abnormality.

Level 1 disposal is the initial control stage. Stock trading shifts from being executed at any time to being matched once every 5 minutes, as if pressing a pause button to calm the market. If a single buy order exceeds 10 lots or cumulative purchases exceed 30 lots, investors must first deposit funds into the system (called “funding transaction”). The system will directly freeze the corresponding funds from the bank account to ensure safety. Meanwhile, margin trading and securities lending are completely disabled, preventing borrowing to trade stocks.

Level 2 disposal indicates a more severe situation. The trading frequency is further reduced to once every 20 minutes, and all transactions must be conducted via funding (i.e., pre-deposited funds), regardless of whether you buy 1 lot or 100 lots. This strict measure often causes trading volume to halve, liquidity to vanish instantly, and entering or exiting the stock to require queuing.

Generally, disposal stocks stay on the list for 10 trading days. However, if during this period, intraday canceling of transactions accounts for more than 60% of total trading volume, regulators will judge that the market is still speculative, and the disposal period will be extended to 12 trading days.

Compared to the T+2 settlement for normal stocks, disposal stocks require full prepayment, significantly increasing short-term trading costs. While you can buy disposal stocks, trading convenience is greatly reduced—this is the price market participants must pay.

Case studies: same restrictions, vastly different outcomes

Disposal stocks can be bought, but what about their prospects? Past cases show the huge differences.

Vanguard Electronics (6756) was included in the disposal list in mid-2021 due to excessive gains. Although trading was restricted, the stock’s popularity remained high, even entering Level 2 disposal. Under heavy restrictions, the stock still appreciated by 24%, becoming a typical example of restricted yet profitable stocks.

In contrast, Yang Ming (2609) experienced a reversal. It was also placed on the disposal list for similar reasons, seemingly with bright prospects, but within just a few weeks, its price plummeted beyond the limit, and it was reclassified as a disposal stock, entering a long period of stagnation. The fates of these two stocks are worlds apart.

Can disposal stocks be bought? Be clear before acting

The answer is yes—disposal stocks can be bought, and there are no legal prohibitions. But in practice, caution is necessary.

Once a stock is classified as a disposal stock, the reduced matching frequency and funding restrictions often cause trading volume to shrink significantly, leading to liquidity drying up. In such cases, it’s generally not advisable for ordinary investors to follow the trend and buy, especially when the overall market is stable and there are many other liquid targets available. Poor liquidity increases holding costs, and short-term traders will face higher transaction costs due to difficulty entering and exiting.

However, there’s an old market saying: “The more restricted, the bigger the rebound.” This means that stocks restricted during the disposal period may experience a revenge rally after the ban is lifted. This usually happens when—during the restriction—chips are relatively stable, and the movement of main funds is clear (since margin trading and securities lending are unavailable, the buying and selling by big players are relatively clean). When restrictions are lifted, these suppressed upward movements may be released in a concentrated manner.

But there are no absolute opportunities—only relative values. Whether to buy disposal stocks should be based on the company’s fundamentals. Disposal stocks are just temporary abnormal trading states reflecting market sentiment swings, not the company’s intrinsic quality.

From a fundamental perspective: Is the company’s core business stable? Are its financial statements healthy? Are key indicators like revenue growth rate, gross profit margin, and net profit trending upward? These factors determine long-term value.

From a chip perspective: During disposal, financing and securities lending are unavailable, making the movement of major funds unusually transparent. Investors can observe after-hours data to see if institutional investors are continuously buying and how many days they keep buying. If institutional funds persist during the disposal period, it could be a positive signal.

A practical tip: confirm whether the stock is consolidating sideways during the disposal period. If so, wait for the rebound after the restriction is lifted. But if the stock starts to decline sharply during disposal, it’s best to retreat and avoid picking up cheap shares. Also, check whether the current valuation is truly low; if you believe it is undervalued, you might consider accumulating during the low-traffic period when disposal stocks are buyable.

Long-term holding of disposal stocks, what to watch

Can disposal stocks be bought for long-term holding? The answer varies by individual.

First, admit that compared to normal stocks, disposal stocks carry higher risks. Abnormal trading behavior often hints at underlying issues—perhaps abnormal corporate operations, financial troubles, or market manipulation. The risks of long-term holding are accordingly amplified.

Second, consider the overall environment. If the stock market is in a bear phase or the macroeconomy is declining, disposal stocks will be hit harder. Conversely, if the market is rising and economic prospects are good, disposal stocks may rebound after the restriction is lifted.

Finally, assess your own risk tolerance. Investors with high risk tolerance can hold long-term if the fundamentals are stable, betting on a rebound after the ban is lifted. Conservative investors should stay away.

It’s worth noting that for long-term investors, disposal stocks can be bought and held because the longer matching times and trading restrictions have limited impact on passive holders. Moreover, regulators often require disposal stocks to regularly publish financial reports, which helps investors stay informed about the company’s operational status and make long-term decisions.

Ultimately, rather than debating whether disposal stocks can be bought, ask yourself: Do you have confidence in this company? If yes, a disposal order alone cannot change its long-term value.