Volume and its Meaning
Volume is one of the most basic and beneficial concepts to understand when trading stocks. Volume is defined as the number of shares or contracts traded in a security or an entire market during a given period of time (investopedia.com). What this means is that each time a person sells or buys a share of a stock, then that is volume.
Think about it, Stock XYZ is trading at $10 per share, and you decide to buy 100 shares. Right upon purchasing those 100 shares, you’ve increased the total volume for that stock by 100. So, I go buy 500 shares, upon this then the total volume increases by 500. But what if someone sells? Still counts because they are shares exchanged, so if Tim decides to sell 5,000 shares at $10 per share, well the volume increases by 5,000 more. This tally is added throughout the day to give you the total daily volume.
- What benefit does that give me knowing the total volume in a given day?
Let’s break down the question. What benefit (or advantage) does the knowledge of knowing the total daily volume (or amount of shares traded in total) for a given day? To understand this we need to understand the basic concept of influence.
It is one thing if I go up to Mom and ask for a cookie, and it is another if you as a friend and I go up to Mom and ask for a cookie. The power of influence tells us that the more people we have asking for cookies, the better chance we will have at getting one. She may say no to me, and heck she may say no to you and me together, but by the time we have 10 of our friends asking for cookies, she may crack and give us some.
That same concept of pressure applies to stocks, because the more people that buy or sell, could cause the price to go up or down. If a stock is trading at an Ask of $100 and a Bid of $99 (for simplicities sake), and 10 people decide to buy, well the odds of that stock going over $100 a share are increased. If we can look at a chart and see that, “hey, there has been thousands of people asking for cookies, I can’t imagine Mom holding out for much longer” well then we can potentially make some money.
So, the benefit of knowing the total amount of shares traded per day is the same benefit of knowing how many times you’ve asked Mom for cookies. If I know that on the third time I ask my Mom she almost always gives me a cookie, well then I will ask three times. Applied to the market, if you know that after 1 million shares of buying a stock it should go up to a higher price, well then once 999,000 shares of been bought Imma buy some and get into the rush.
By knowing the total volume on a day, you can understand the power of influence on a given stock. The greater the volume, the greater the influence for the price to change. In cookie terms, the more people we get to ask Mom for cookies, the greater the chance we have at getting some.
This basic understanding of volume as you can imagine can give you a huge advantage when trying to understand why a stock will go up 5% some days and only 1% on others. Think about news and its affect on a stock. “Oh man, Apple’s Ipods have hit all time sales highs! This is great news!” You then go look at the stock to see that it is up already 8%. You then go look at the volume on the day and notice that instead the avg 1 million shares it has traded 5 million. Hmm…. power of influence anyone?
Every time you look at a stock, it is important to know how much volume on average per day the stock trades. This is important because it tells us when a day will have more influence than any other day. If I know that my favorite company, Big Boyz Toys just CANT break and stay past $30 a share for some reason. I don’t know why, I’ve been watching it for months and it just can’t get past that $30 mark. I then take a look at a stock chart and realize, “hey, on those four tries the stock only traded half its average volume, no wonder if hasn’t gone over the top, there isn’t enough people asking for cookies!”
Utilizing that basic information I can then understand and try to figure out when the stock will break past $30. I want to buy the stock on the day it trades tons of shares and trades over $30, this is my sign that it is going to stay above $30. Remember, the more people pressuring the better chance we have at getting what we want.
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Re: Volume and its Meaning
Hi Blain,
Do you know of any price/volume pattern studies? Like, what’s the volume pattern for a head & shoulders?
thanks
rich
Hi There………
thanks for your informative article…
I have a small doubt on the stock volume…
If somebody selling 100 shares of Google and I buy these 100 shares then the total volume on Google is increased by 200 shares? or 100 shares?
Best Regards,
Vaibhava
If you purchased the exact 100 shares that the somebody was selling, volume only increases by 100. But, if somebody sells 100 shares of Google and completes the order, than a few minutes later you go and buy 100 shares of Google, volume will increase by 100 again so 200 total since they are two separate transactions. Hope that makes sense.
how can we know that company shares price are going to increase?
Hi Pavitra,
Are you asking in regards to interpreting volume? With or without strong volume, no investor truly knows a stock’s share price is going to increase (as that would be fortune telling to an extent). The way traders make money is by studying historical patterns and data and uses it to make an “educated guess” as to whether or not the stock price is going to go up.
Hope that helps!
The price would most likely do down then. Your understanding is basically right on the money.
The more people that buy the stock at the same time, the higher the price will go. For example, when a stock announces it is going to be bought for $100 a share when it is currently trading at $80 a share, do you have 5 days to grab shares at $80 before it shoots to $100? No way. Within 10 minutes the stock will be trading at $100 a share, why? Huge demand, limited supply, stock goes up in price.
Blain,
I have no idea what you were trying to say in your article, simply because this simple supply-and-demand economic theory is too obvious to me and your points make no sense at all.
“Power of influence”? Strong demand (more people biding on one stock, for the sake of simplicity here) most likely powers the price up. Volume does not necessarily indicate how strong the demand is, because volume is in past time and demand is a future force. For instance, one stock increases 50% during one trading day and volume is 10 times average, will you buy this stock at 9:30am the next day given your only reason is the huge volume? In theory, stocks follow a Brownian Motion, which basically means independent of what happened in the past.
Volume is just a simple measurement of how active the market WAS. However, this “active” could be both good and bad under normal circumstances. If news is neutral, in one trading day, +5% and -5% on one stock price would most likely create the same volume.
Again, volume measures what happened before and is weakly correlated to future stock price movements. High volume does not necessarily show strong investor confidence or market demand. It however indicates the degree of investor anticipation mixture in the past. Volume is resulted from trading which includes both buying and selling. When the stock price meets BOTH buyer and seller’s interest, that is where the trade happens and volume is created. Under an extreme situation, if everyone thinks the price will keep going up, there will be no seller, and therefore no volume will be created. It does not make sense and is irresponsible to say that high volume indicates a likely price increase.
Back to the cookie thing, you and your friends will probably only ask for cookies if only you knew the cookies were “good”. If you knew the cookies were “bad”, less likely your friends would still ask for cookies with you. On the other side, if the moms want to get rid of some old cookies, she may just throw them to you without being asked at all. My point is, ultimately, the quality of the cookies drives the number of friends wanting to ask for them with you and whether or not the mom wants to give to you, not the other way around. Also, the number of friends asking for cookies is not “volume”. It shows the demand which is a future force. Apparently, comparing stock volume and this cookie thing is like comparing apple to orange. They all look round, but are totally two different things.
Welcome to discuss!!