What Is the Definition of Stock Volume?
Volume is an important indicator for traders in analyzing market activity and planning strategy because it is the business of the market itself: the buying and selling of shares. After price, volume is one of the most commonly quoted data points related to the stock market and reflects the overall activity in a stock or market.
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Features
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Volume measures market liquidity by counting the number of shares that are traded over a given period. Volume data is recorded for individual stocks, exchange traded funds (ETFs), options and for indices as a whole. Normal volume for each of these exists as a range, with trading around holidays and shortened sessions usually at the lowest end. Spikes or dips significantly higher or lower from normal volume are usually regarded as in important indicator.
Identification
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On most stock charts, volume is displayed horizontally as a histogram beneath price data. Large, commonly traded blue-chip names typically trade in the tens of millions of shares per day; the major indices can easily see several billion shares changing hands in a single session. Smaller, illiquid stocks frequently only measure in the tens of thousands or less. On most trading platforms and on the floor of exchanges, daily volume is simply represented by the numerical digits.
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Types
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In addition to normal volume measurements, traders also look at volume-by-price, which is usually displayed as a vertical histogram. This type of chart shows the number of shares trading at various price increments, providing insight into the support and resistance levels that tend to trigger the most buying or selling. Combining price and volume into a single chart, volume-by-price is a powerful indicator that illustrates how professionals use internal market data to plan profitable trades. Index analysts will also watch up volume, the number of shares traded in advancing issues, and down volume, the number of shares moving in declining issues, as these figures are used in other calculations.
Significance
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Volume reflects the supply and demand for stocks. A stock with low volume is said to be illiquid, which presents unique risks and opportunities. When volume is low, the spread between what buyers are willing to pay and what sellers are asking to take will increase, making successful trades harder to make. As a result, selling an illiquid stock quickly can be difficult or impossible without accepting the lower bid price. Also, because the spread is wide, illiquid stocks are given to large price fluctuations in either direction when they do trade.
Considerations
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Traders frequently look to volume in determining the conviction of a move in stocks. Remembering that price is only an indication of the last trade, the transaction of a single share can move a stock. But movement on low volume suggests an aberration that is not likely to be sustained. Larger than normal volume, on the other hand, is evidence that traders are confident about the direction of the stock's movement and are willing to put money on the line. Contrarians, however, view extraordinarily large volume after a mature trend as a sign of an imminent reversal.
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References
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- Photo Credit Stock exchange image by mearicon from Fotolia.com
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Comments
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The explanation of the volume is not to the point. A low ability staff, apparently, copied from text book, shuffled the word, then pasted. The explanation is not to the point and clear, thus not helpful.
