Understanding Trading Volume

"Trading volume" is a term that is commonly used when speaking of the stock market or other financial markets. The trading volume of a market is essentially the number of trades that take place during a given period of time. For traders, the trading volume may not seem like a very important statistic. However, trading volume plays a vital role in the market and how it operates. Here are a few things to consider about trading volume.

Trading Volume

Trading volume is most often quoted as the number of trades that take place during a given trading day. This particular statistic takes into consideration the number of securities that are bought and sold. Therefore, it does not matter if you are buying or selling, you are contributing something to the overall trading volume. The trading volume could be looked at as a total for the stock exchange for a particular day. It can also be evaluated on an individual stock basis.

Following the Action

Many traders like to pay attention to trading volume because it allows them to follow the action in the market. They will look at the stocks that are trading at much bigger volumes and then decide to get involved. In many cases, when trading volume increases, this drives up the price of a stock. Anytime that there is a lot of activity, it attracts traders and the prices tend to increase.

Liquidity

Another aspect that is affected by the trading volume is the liquidity of the security. When there is a great deal of trading volume, this means that there will also be improved liquidity for traders. When you want to buy or sell a security, it is always helpful to have many traders that are interested in doing the same thing. This will lower the spreads on the transaction and you will be more likely to get instant execution when you place an order. When the volume of trading is light, it can be difficult to find a counter party to trade against at the price that you want. This means that you might have to concede a higher price when you buy a security.

Announcements

In many cases, spikes in trading volume will come around important announcements regarding a company. For example, when a company has some type of newsworthy item in the media, many people will start buying and selling the stock. In other cases, the trading volume will spike around an earnings report. Many stocks see their trading volume increase four times per year right around the time that the quarterly statements are released. If the statements are good, the price of the stock will generally increase around the statement release.

Institutional Investors

If you are paying attention to trading volume, institutional investors might have an impact. Sometimes, there will be a random spike in volume without any financial indicators to justify it. This is generally the result of institutional investors buying a large amount of stock in the market place at once.

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