Definition of Volume in the Stock Market

In the stock market, volume refers to the total number of shares that exchange hands over any given time period. Today, billions of shares regularly cross from buyer to seller everyday on major exchanges like the New York Stock Exchange and Nasdaq National Market. While just an interesting statistic to some, to others volume is an excellent tool for evaluating the strength of the market and where its prices are likely to be headed in the future.

History

Volume first began to be seriously recorded once stock exchanges became more sophisticated in the late 18th and early 19th centuries. It was only in the 20th century that market analysts began to study volume trends for clues as to how they could use it to help them make profitable investment decisions.

Significance

Volume is one of the most important statistics in the stock market, both for the market as a whole, as well as for individual stocks. Next to price, volume provides the best indicator of how strong a stock or the market at large is at any given time, giving investors a signal as to whether or not a stock is good to buy.

Features

The primary features of volume in the stock market are simply a buyer and seller. Every time shares are exchanged, it's added to the total volume tally. From this, a variety of sophisticated volume analysis tools such as the Accumulation/Distribution Line and On Balance Volume can be calculated, providing investors tools to determine if money is flowing into or out of stocks, and if volume confirms recent price action.

Types

Investors have developed many different types of ways to study and extrapolate buy and sell decisions from volume. One of the most common is to see if volume trends are confirming recent price action, or negatively diverging. In the case of confirmation, price and volume are thought to be in alignment, suggesting the stock will continue on its original trend. When volume diverges from price, on the other hand, it's thought that a stock's price might soon be due for a reversal.

Time Frame

Volume can provide important cues in almost any timeframe, from short-term intraday trading to multi-year investing. In short-term trading, for example, traders often look for volume surges to indicate that the price of a stock has reached a near-term high or low, punctuated by extraordinarily strong volume.

Warning

Most publicly traded stocks have a daily volume of hundreds of thousands to millions of shares. This is very important because it ensures good liquidity, allowing investors to freely buy and sell shares at exact market prices. Low volume stocks, by contrast, punish investors by forcing them to pay a large bid/ask spread to enter and exit a position, which can sometimes make the difference between a profitable trade and an unprofitable one.

Resources

• Volume