Understanding Volume in Stock Trading

Trade volume refers to the total number of shares of a specific security that are traded at a specific period of time.

When it comes to trading the stocks of a certain company or investing for the long term, it is important to know that you are not the only investor or trader of that company.

And unless it is a small business that you own, in which case it doesn’t even fall under this category, chances are that your shares are small compared to the thousands of other investors interested in the same company’s stocks.

Consequently, the activities of other investors by and large, affect you as well. One way to determine the activities of other shareholders in relation to stocks you also invest in is by tracking trade volume.

Simply put, volume refers to the total number of shares of a specific security that are traded at a specific period of time. It refers to the number of shares that are sold, or traded, over a periods which are usually determined in days.

When there is a high daily volume, it means the activities of the market are a lot probably as a result of positive news with high efficiency and when the daily volume is low, you can say not much happened during the day enough to make investors react.

Volume could cut across the shares of an individual stock as in how much shares you trade over a period of time as an investor, the number of options contracts that are traded, as well as the total number of shares exchanged within an index or in the stock market in a day.

Here are some things the volume of a stock could tell you”

Activity

As you can already tell, it is used to track activity of the market. What shares are investors running towards and which ones are they dumping? Which ones barely move at all? Trade volume can show you.

Trend Analysis

Investors often use trading volume to confirm the existence of a trend as well as its reversal or continuation. In a situation where trading volume increases, prices tend to move in the same direction.

For one, if the price is rising, investments will increase as well hence, the volume will rise.

Investment decisions

Ultimately, this is a form of technical analysis particularly for traders who can use deductions based on volume to make decisions on whether to buy or sell stocks.

For one, technical analysts use a stock's volume in order to determine the best entry and exit points for a trade. It can also signal when an investor should take profits and sell a security due to low activity.

So much can be deduced from assessing the volume of trades or stocks. In our next post, we would consider some of them.

Written by Lawretta Egba.