What is trading volume?
How much trading interest does a security have? One way to measure this is to look at trading volume. This represents the total number of shares traded over a given period of time – usually one trading day.
A high trading volume means that more stocks were actively traded; if the trading volume is low, it means fewer shares have been traded. It is important to note that trading volume includes both buying and sell orders.
Trading volume can be measured for most types of securities, including stocks, bonds, options, futures and commodities.
Why is trading volume important?
Trading volume is important because it represents investor interest in a company. It can also illustrate the momentum that occurs when stocks, assets or sectors are trending up – and perhaps just as importantly, volume can also help indicate when a trend is ending. Often the greatest volume occurs at a peak.
When viewed alongside other indicators such as a stock’s fundamentals, trading volume can help investors decide whether it’s the right time to buy or sell stocks. For example, if a company has reported consistent earnings that beat expectations and trading volume continues to rise, it can be a sign that the company is gaining momentum — and that it’s worth investing in.
How is trading volume calculated?
Because trading volume simply refers to the number of shares of a given security traded over a given period of time, it’s not actually calculated – it’s just counted and reported.
However, when discussing trading volume, it is important to note the time frame in question (e.g., stock A had a trading volume of 1,000,000 during the 8/31/22 market session). Most often, trading volume is discussed in terms of a single day or trading session, but it can also be useful to look at a security’s trading volume over both shorter (like an hour) and longer (like a week) timeframe
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What does high volume trading indicate?
High trading volume means there is greater market interest in a stock, resulting in greater liquidity. Large-cap stocks, for example, are considered highly liquid because their trading volume is high and the price buyers are willing to pay, known as the bid price, is close to the price a seller will accept, known as the ask.
What indicates low trading volume?
Low-volume stocks like small caps trade less often than larger-cap companies and are sometimes traded on smaller, less liquid exchanges. They are characterized by a low volume and low liquidity. This means that the price per share that a buyer offers can differ greatly from the price that a seller accepts. The difference between a stock’s bid and ask prices is called the spread, and smaller volume stocks tend to have larger spreads. When this type of stock experiences a surge in demand, it can also experience a lot of volatility. Therefore, low volume is a risk associated with smaller capitalization companies.
Does trading volume affect the share price?
Everything in finance boils down to supply and demand. And while trading volume doesn’t directly affect stock prices, it can affect the way stocks move.
Large-cap stocks have tight bid-ask spreads, so they also have more opportunities to trade and therefore trading activity occurs easily – one investor may see an opportunity to buy while another may see an opportunity to sell, and may be just a penny difference between the offer and the offer. The influence of trading volume would be negligible here.
But in thinly traded stocks like small-caps and micro-caps, which have lower volume, there are simply fewer shares outstanding. As such, stock prices often move haphazardly as their trading activity results in larger price swings due to much larger bid-ask spreads.
Where can I find the trading volume of a stock? What about after hours?
Almost every trading and charting platform displays trading volume in a bar chart at the bottom of the price chart. Here is an example of Apple (NASDAQ:AAPL) stock from Stockcharts.com.
Here, the red and black bars at the bottom of the chart represent the trading volume for each day shown.
While normal trading hours are between 9:30 a.m. ET and 4:00 p.m. ET, after-hours trading occurs after the exchange closes from 4:15 p.m. ET to 8:15 p.m. ET and before it opens, between 4:00 p.m. 15 p.m. ET and 9:30 p.m. ET. After hours trading volume can be found on stock exchange websites such as NASDAQ and NYSE.
How much volume is considered “good” for day trading?
It is difficult to objectively define what is “good” as trading volume is often analyzed in combination with other indicators such as volatility, momentum and liquidity. In fact, investors might consider trading volume synonymous with that audience a security has at any given time, how large or small that audience is, and how often they trade in a “herd mentality.” After all, successful investing can be as much a question of controlling one’s emotions and expectations as it is of reading charts and data.