When you buy or sell stock in a company, you’re far from the only one. Depending on the size of the company and the number of shares available, there could be millions of shares changing hands each day. To understand just how active traders are when it comes to a specific company, we need to look at stock volume. 

Stock volume is the total number of shares traded on the market during a specific period of time. Each transaction within operating hours adds to the total volume count. In a nutshell, stock volume shows how many total shares trade hands, and can indicate bullish or bearish sentiment. When looked at in the context of price, trend and the broader market, volume offers clues on everything from momentum to volatility. 

Here’s a closer look at stock volume and how it correlates to other important metrics when evaluating a potential investment. 

Stock volume is a great metric for investors to use

What Does Stock Volume Tell Investors?

Volume is, at its core, a measure of investor sentiment. Stock trades require a buyer and a seller; however, volume only measures the number of shares that change hands. As a result, it becomes an intrinsic measure of buyers vs. sellers. 

  • More shares changing hands means buyers are keen to buy at the current price. High volume tends to drive the price of the stock higher as some investors take profits and others open a new position. Healthy volume often correlates to healthy stock performance.
  • Low volume indicates bearish sentiment. Fewer sellers indicate a willingness to hold instead of locking in losses. Those selling are exiting or covering for fear the price will fall further, while buyers seek to capitalize on the current price. Low volume generally indicates a stock that’s mired. 

Trading volume tells the tale of investor interest in a stock—and it varies heavily based on the market cap, sector and nature of the company. For example, a company like Apple (NASDAQ: AAPL) might hover around 60 million shares daily. Meanwhile, a much smaller company like First Bancorp (NYSE: FBP) might average just 1.5 million shares daily. This disparity is why it’s so important to look at average daily trading volume for each stock. 

What is Average Daily Trading Volume

A company’s average daily trading volume sets a benchmark for how active the stock is on any given trading day. Deviation from this average—high or low—is a signal to investors to impending price changes. 

For example, if the average daily trading volume for ABC Company is on million shares and on Thursday, two million shares change hands, it’s a 100% increase. Investors can likely correlate a piece of news, an upcoming earnings report, a company announcement or something similar to a spike in investor interest—and a price increase. 

Average daily trading volume can also shed light on cyclical behaviors. For example, if ABC Company is a landscaping company, it might see higher daily trading volumes in spring and summer, and relatively lower volumes in fall and winter. Investors aware of this cyclical trend can track daily trading volume to capitalize on growing or slowing momentum. 

Average trading volume, measured over time, can also show investor interest in companies. For example, if ABC Company had an average trading volume of one million shares six months ago, two million shares three months ago and four million shares today, there’s clear bullish demand. If the inverse occurred, it would indicate a bearish outlook. 

Volume as a Measure of Liquidity

Rising and falling share volumes don’t just represent bullish or bearish sentiment: they’re also a measure of liquidity. Low volume means traders aren’t willing to buy shares at the current price, which means sellers might be stuck holding their position. Conversely, higher volume means higher liquidity, since shares change hands more freely. Stocks with high trading volumes are “active” stocks.

It’s important to remember that high-frequency traders and institutional investors can play a role in stock volume. As a result, as much as 10% of a stock’s daily trading volume might actually belong to day traders and day trading algorithms. 

Price Movement vs. Volume

Stock volume is an important metric in technical analysis—especially when paired with price movement. Traders use this combination to determine entry and exit points for positions. They’re looking at the correlation between volume changes and price movement: the higher the volume the more significant the price movement. Technical analysts realize that “price movements with strength” signal agreement between buyers and sellers.

Technical analysts also use price and volume to pinpoint reversals in patterns. For example, if the price of a stock is stabilizing near a support level, traders may look at trading activity and volume to identify breakout momentum before it occurs. High selling volume can signal reversal on a price ceiling, while high buying volume may signal an uptrend from a support level. 

The relationship between price movement and volume in technical analysis is a strong factor in determining opportunities. Technical traders often overlay volume bar charts with other charting to identify where volume correlates to certain patterns. 

Pay Attention to Volume When Considering a Stock

Investors have a bevy of tools at their disposal when it comes to evaluating a stock. Volume is one of the simplest, yet most insightful measures of its performance. A stock with consistent, high volume and good price appreciation is a healthy one. Stocks with erratic or low volume and price volatility are often a gamble. Volume is one of the first things investors should examine when considering companies outside of institutionally-held blue-chip stocks.

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