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Table of Contents:
- What does volume mean in stocks?
- High volume vs. low volume
- How does volume affect stock price?
- How to use volume in stocks
- Helpful volume indicators
- The bottom line
Are you ready to learn how to invest in stocks? The easy part is finding a broker (for example, you could download the Public app). What’s much harder is figuring out how to invest in stocks well. This means studying real-world data like (like quarterly finance reports) and getting what insight you can from the stock market. One place to look for insight is the number of shares changing hands over a particular period. This is known as volume.
What does volume mean in stocks?
Stock volume is the number of shares traded over a period of time (typically daily, weekly, and monthly). Stock volume alone doesn’t show you how a stock is performing.
You need to look at the ratio of people buying vs. selling. Stock volume is a tool to help you understand current stock trends.
Throughout the trading day, investors buy and sell stocks, and the transactions that occur between them lead to the total volume of that stock for that time period (in this case, a day). Therefore, the data that’s collected and reported during the day are estimates, with the final trading volumes for that period reported the next day.
Investors look at trading volume to help evaluate a stock’s activity and liquidity, which is the ease with which transactions can be completed. For example, high trade volumes suggest high liquidity and easy order processing because it’s easier to match buyers and sellers when there are more of them.
Key Takeaways:
- Volume allows investors to chart a stock’s trading activity over time and identify its strength or weakness.
- When prices rise, the volume may follow, which can be one of the technical indicators of the strength of a stock in the market.
- Charting tools can be used to identify patterns and trends in the market, such as breakouts and price movements.
- Knowing the volume of stocks and exchange traded funds (ETFs) is helpful in evaluating trends in the market.
High volume vs. low volume
One of the easiest ways to identify volume is on a bar chart, which is a chart made up of bars showing trading volume over a specific period of time. When the bars move higher than the average, it can indicate high trading volume at a specific price for that particular time frame.
Investors and analysts use bar charts to look for trends and establish price movements either up or down. An increase in volume when prices shift is viewed as a strong signal. Volume in stocks can be specified as high volume and low volume, based on each stock’s trading activity.
What does high volume mean in stocks?
- Low Volatility. Stocks that have a high volume of trades may be less volatile, reducing risk factors.
- Liquidity. As discussed, liquidity offers the ability to buy and sell stocks easily. When more investors are trading in high volumes, it’s easier to liquidate the stock.
- Narrow gaps. Stocks with high volumes seem to have closer gaps between the bid and ask price, offering better opportunities for buyers and sellers.
What does low volume mean in stocks?
- Potentially high volatility. With lower trading volumes, the stock may have more significant price swings, adding more risk to trades.
- Lower demand. Stocks with low trading volumes can be obscure due to lower demand. Still, some investors find low-volume stocks may have the potential to increase in value over time.
Average volume in stocks
Average daily trading volume (ADTV) is the average number of shares of a specific stock traded each day. To calculate it, you take the total volume of trades over a particular time period and divide that number by the number of days.
For example, let’s say you want to know the ADTV of a stock over a 30-day period. You would list the daily trading volumes for each day over the last 30 days, add them together to get the total number of trades for that time and divide that number by 30 to get the 30-day ADTV.
It can be helpful for traders to know the average volume of stocks to identify any changes that may have occurred. When there’s a significant increase or decrease, it can mean a shift in how the asset is valued by investors.
How does volume affect stock price?
When a stock’s trading volume rises, it can signify that investor demand is high, and stock prices may go up as well. One approach traders use to evaluate a stock is technical analysis. This trading method analyzes trends such as price shifts and volume to help investors assess stocks and identify opportunities to trade. When viewing a stock chart, volume may be found on the y-axis.
Investors that use technical analysis view volume as a significant indicator of movement in the market. Investors are more likely to see a change in the price of a stock as foreshadowing more movement in the same direction if the volume also increases during and after the price change.
How to use volume in stocks
When using volume as part of a trading plan, having some strategies for analyzing the strengths or weaknesses of a move can be beneficial, as they can provide insight into an entry or exit point. A few things to identify include:
- Confirm market trends
When the market is in an uptrend, volume for that stock may rise as more buyers enter and push prices higher with each transaction. However, the volume may occasionally decrease as prices rise, pointing to a lack of interest or changes to that stock and a possible trend reversal. As noted earlier, large movements can mean a significant change, whereas smaller shifts can be less critical.
- Market exhaustion
There are times when an upward trend in buying a particular stock can become exhausted, leading to sharp price and volume changes that can signal the end of the trend. Of course, some investors won’t want to miss out, so they buy high and volume spikes, but when the flurry of activity ends, the price stabilizes and then falls, as buyer interest is depleted.
- Reversals
When prices stabilize after an extended price move, either higher or lower, it may signal that a reversal is on the horizon, with significant volume and prices changing direction in an uptrend or downtrend.
- Bullish market signal
A bullish signal may occur when the volume moves up on a price downturn, then the price rises and falls again. If the downturn doesn’t fall below the previous low and the volume drops on the second downturn, it may be considered a bullish indicator.
- Recent volume history
Since stock market volume can change significantly, it’s a good idea to focus on more recent volume charts to get the most accurate data.
Volume in stock market and technical analysis
Technical analysis may help in finding opportunities and trends through trading activity such as volume and price movements in the stock market.
Technical analysis attempts to make sense of stock movements: Price movements accompanied by higher trading volumes are viewed as more significant, while price movements accompanied by lower trading volumes are seen as less significant.
As discussed, investors and analysts can use bar charts to simplify the ability to see stock volume trends and confirm price movements. Trading volumes can be considered a measure of the level of interest in a company. Considerable activity and high volumes show that there is demand for the stock.
Helpful volume indicators
We’ve seen that volume can be an important signal for evaluating stock trends, and several indicators may offer some value when making investment decisions. Although there are a variety of volume indicators available, they may not all be relevant for you, as each investor differs in their approach.
Volume indicators are mathematical formulas, and each one differs from the next to provide information that can be useful in aiding in making investment decisions. Some of the most popular include:
- On-balance volume indicator (OBV) is an indicator that measures the volume of a stock in relation to whether its price is rising or fallingIn practice, it works like this:
For example, let’s say that yesterday the stock closed at 5000 shares.
- Today, if the stock closes higher than yesterday, the OBV = yesterday’s OBV (5000) + today’s volume.
- But if the stock closes lower than yesterday, the OBV = yesterday’s OBV (5000) – today’s volume.
- The Chaikin money flow indicator is a short-term indicator. It’s a sum over the previous 21 days of a value that is positive if the day’s close is near to the day’s high and negative if the day’s close is near to the day’s low. Days with higher trading volume are weighted more than days with lower trading volume. This is thought to provide a measure of the stock’s strength.
- Relative strength index (RSI) measures how quickly a stock’s price has changed recently.
- The Klinger oscillator compares volume to price, and is designed to identify possible price reversals.
The Bottom Line
Trading volume is a valuable tool in evaluating the strength or weakness of a stock at any given time. It offers information about and can assist in confirming price moves and breakouts that can identify price changes and reversals in the stock market, which can help determine trading strategies.
There’s no shortage of information or tools available when it comes to taking steps to start investing. There are always risks, and no tool or strategy guarantees success, so it’s essential for every investor to evaluate what risks are acceptable to them. Never risk money you cannot afford to lose.
That said, investing is still a great way to plan for future financial goals. If you’re ready to get started learning about how stocks work, download the Public app. It’s easy to use and will allow you to have all your investments at your fingertips!