Taking a look at trading volume can be a great way to help investors spot investing trends. You can see when traders are piling in to buy a share and when they’re pulling back and not investing. Here we examine the question, “what is trading volume?” and we answer common questions such as “why is trading volume important?” and “what does it mean if a stock has a high trading volume?”.
What is trading volume?
Trading volume is the total number of investment assets that were bought during a trading day, including stocks, bonds, futures and commodities.
High volumes are usually a good sign for investors because they show it’s easy to buy and sell those assets.
Trading volumes also give investors a heads up that something is happening with a stock. A sudden change in trading volume could indicate that traders are rushing to buy or sell off a stock.
How trading volume works
Stock markets each record their own trading volume and provide data for investors. An estimate of the volume is reported regularly, usually hourly during the day and again at the end of the day. Some stock exchanges, like the London Stock Exchange, also provide information on the companies with the highest current volume of trade.
The hourly trading figures are an estimate, whereas the daily figures are more accurate. They are reported the next day, after the market closes.
Why is trading volume important?
Trading volume is important because it can draw your attention to something that’s happening in the stock market. A rise in share prices, combined with high trading volume, suggests that traders have spotted a buying opportunity.
The volume of trade is also linked with liquidity. Good liquidity means a trader can buy and sell shares quickly at their desired price.
A low volume can indicate that it’s difficult to sell a share or asset. This means the price is less predictable and a seller may have to wait for a buyer.
What affects the trading volume?
Trading volume often changes on different days and tends to be higher near when the market opens on Monday morning and near closing time on Friday. It also tends to fluctuate during the day, with higher volumes at the beginning and end of the day and lower volumes around lunchtime.
In times of economic uncertainty, the stock market can be affected. Stocks, futures and options are often traded more. A stock market crash leads to a huge volume of shares being traded as investors rush to sell shares or buy futures, based on new market information.
Where can I find the volume figures?
Trading volume is often shown along the bottom of a stock price chart. Charts show volume as a bar graph, with information on the number of stocks traded each minute or each day, depending on the graph.
How does the trading volume affect a stock price?
Increased trading volume suggests something is happening with a stock and traders should take notice. Increasing volume usually happens when there is price volatility. Traders are either traders rushing to sell a stock or piling in to buy it.
If most transactions happen at the bid price, then the price will start to move lower as sellers want to dump the stock.
If most of the volume takes place at the ask price, then the stock price will move higher. In this case, the increased volume shows buyers believe the stock is moving upwards, and want to purchase the stock.
What is a high volume?
Trading volume varies significantly from day to day and from stock to stock.
A sudden shift in the volume may suggest traders think a stock is either over or undervalued and are rushing to buy or sell the stock.
What does it mean if a stock has a high volume of trade?
If a stock is traded more often than usual, it could suggest that something is up with that company. Traders are rushing to buy or sell more of the stock than usual.
A sustained high volume of trades suggests that an upward price trend could be sustained. That’s because traders are still interested in buying the stock.
What does it mean if a stock has a low volume of trade?
If a stock has a low trading volume it suggests that it’s business as usual for that company. Traders aren’t rushing to either buy or sell more of the stock than usual.
A low volume can also mean that a stock or asset has a lower liquidity and it is harder for traders to buy and sell that stock or asset. This means traders can get stuck with positions they can’t sell and see their losses increase. Low liquidity can also lead to a bigger gap between bid and ask spreads, meaning you will have to pay significantly more to buy a stock than to sell it.
What does it mean if volume is reducing?
If volumes have been high but are dropping, it could indicate the traders are losing interest in a stock. It may be a sign that an upward trend in prices won’t be sustained.
How to use volume to your advantage
You can use trading volume to help you spot trends in share prices and investor confidence.
For example, if you’re thinking of buying a stock and notice the price is trending upwards, you might decide to look at the volume of shares being sold. If the volume is increasing this might suggest the price trend is likely to continue as traders are keen on buying the stock. You could wait to see if the volume continues to increase, before taking the plunge and deciding to buy.
Make sure you also look at other information like investing news to understand why a share price is moving up or down.
How to calculate volume in stocks
Here’s an example to show how trading volume is calculated. Let’s assume a market has 2 traders A & B. Trader A buys 1,000 shares of stock X and sells 500 shares of stock Y. Trader B sells 1,000 shares of stock X and buys 500 shares of stock Y. The total volume of trade is 1,500 (1,000 shares of stock X and 500 shares of stock Y). This is because the volume is only counted once for each share.
If you’re thinking of investing your hard earned money in a stock, then you’ll want to know as much information as possible. Trading volume can help investors to spot price trends and work out whether traders are interested in a stock. High or rising volumes of trading often suggest that share prices are on the rise, whereas low trading volume can indicate traders have lost interest in a stock. In this case a price rise may falter and prices might drop back.
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