When you’re exploring stock trading, you might frequently come across the term “volume”. Understanding stock volume may enhance your investment strategies and can help you make more informed decisions. Let’s dive into the essentials of stock volume, covering everything from what volume is in stocks, why it matters, how it impacts stock prices, and how you can use it to make more informed investing decisions.
So, let’s get started.
In stock trading, volume refers to the number of shares traded for a particular stock over a specific period, usually one trading day.
It shows you how actively a stock is being bought or sold, reflecting the level of interest and liquidity in that stock. Volume is typically displayed as a daily total and fluctuates based on market conditions, news events, and investor sentiment.
Stock volume alone does not 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.
For example, if the volume of ABC Corp. is reported as 3 million, it means 3 million shares of ABC Corp. changed hands that day. Volume is updated throughout the trading session, giving you a real-time look at market activity.
Volume measures the number of shares traded and can signal buying or selling interest in a stock.
High volume generally indicates liquidity and trend strength, while low volume can signal a lack of conviction.
Volume-based indicators like RVOL, OBV, and VWAP can provide deeper insights into market sentiment and trend momentum.
Volume is best used with other indicators for a comprehensive approach to stock analysis.
Knowing the volume of stocks and exchange-traded funds (ETFs) is helpful in evaluating trends in the market.
Volume isn’t just a number; it’s a vital indicator of a stock’s market behavior. Here are some ways volume may benefit you as an investor:
1. Liquidity insights: High volume means higher liquidity, allowing you to buy or sell shares more easily without significantly affecting the stocks price. Stocks with high liquidity are generally easier to trade and have narrower bid-ask spreads, which might make them ideal if you value flexibility.
2. Price trends and momentum: Volume may often signal the strength of a price move. When volume rises along with the stock’s price, it may suggest strong buying interest and support the price increase. Conversely, when volume falls as the price drops, it may indicate strong selling interest. This connection between volume and price movement can help you confirm trends and spot potential momentum shifts.
3. Market sentiment: Volume can give you insight into the sentiment behind price moves. For example, a price increase accompanied by high volume often indicates strong investor confidence, while a price drop on high volume might signal broader selling pressure. By watching volume, you get a sense of whether the market is bullish or bearish on a stock.
Let’s look at how high and low volume levels impact a stock’s performance and trading behavior. Knowing the difference can help you interpret market activity more effectively.
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 stocks trading activity.
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.
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:
RVOL shows how today’s trading volume compares to the average volume over a specific period. For example, an RVOL of 2.0 means the current volume is twice the average, suggesting heightened interest and a potential for strong price movement.
OBV is a cumulative indicator that adds volume on up days and subtracts volume on down days, showing whether buying or selling pressure is driving the price trend. A rising OBV signals buying pressure, while a falling OBV suggests selling.
VWAP represents the average price of a stock based on volume and price during a trading session. This metric may often be used by institutional investors to ensure they’re buying at a fair price relative to the days average.
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 who 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.
Here are some common scenarios:
For example, in early 2024, a popular renewable energy stock saw its volume skyrocket as more investors took an interest in green energy. This spike in volume, combined with a price increase, signaled strong confidence in the stocks future.
Monitoring volume is easy, and its right at your fingertips on most trading platforms, including Public.com. Look for the “trading volume” and “average daily volume” metrics on your dashboard. These tools make it easy to see if a stock is trading at above-average volume or if things are relatively calm.
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:
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.
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 don’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.
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.
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.
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.
Read More: What is a Bull Market?
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!
Volume in stock refers to the total number of shares traded during a specific period, indicating the level of trading activity and investor interest in the stock.
High volume usually indicates strong investor interest, often signaling that a price trend has momentum, whether upward or downward.
Low volume can suggest lower liquidity, meaning it may be harder to buy or sell the stock without affecting its price, and may also indicate weaker market interest.
