What is Volume in Stocks?

Trade volume is one of the most common terms you will encounter as a stock market investor. Trade volume is a simple concept, but it is a key indicator for a stock and its trend in the stock market. For example, trade volume can give you a breakout signal when a stock price moves above a certain level. Conversely, it can also signal a decline when a stock price moves below a certain level. Here is some information about trade volume and how you may be able to use this indicator when you make trading decisions.

What is stock trade volume?

A stock’s trade volume indicates how many times investors bought and sold shares of the stock during a specific time, usually during a one-day trading session. Every time you buy or sell shares of stock in a company, each transaction for each share counts toward the stock’s trade volume.

Stocks with a high trade volume are typically of well-established or trending companies, such as popular tech stocks. Many others have a low trading volume, such as stocks of smaller, little-known companies.

There is no specific definition or threshold for a high- or low-volume traded stock. However, in major stockmarkets, high-volume stocks typically trade at least 500,000 shares, while low-volume stocks trade around 1,000 shares daily.

An Example of Stock Trade Volume

A ticket is issued every time you make a trade, whether you buy or sell one share of stock or more. Tickets are required by the Securities Exchange Commission and confirm your trade’s execution. Here is an example of how trading volume works:

  • When you buy 100 shares of stock in a company when the stock market opens, that counts as one ticket, and the trade volume for that stock is 100.
  • When you sell 50 shares of that company’s stock in the afternoon, that counts as one ticket, and the trade volume for that stock is increased by 50.
  • When you buy 200 shares of stock in that same company right before the stock market closes, that counts as one ticket, and the trade volume is further increased by 200.

In this scenario, the total of your contribution that day for the trade volume of that stock is 350. Therefore, if you were the only investor who made these trades during the one-day trading session, this would be a low-volume stock. However, if 2,000 investors made the same trades on the same stock during the one-day session, then the trade volume for this stock will be 700,000, which will make this a high-volume stock.

How can trade volume help you with making trades?

Trade volume in stocks is one of many indicators that can help you make sound investment decisions. Many investors look at trade volume as a sign of a stock’s liquidity and overall strength or weakness with other indicators and stocks. An increase in trade volume typically means the stock is strong, and the price will not fluctuate dramatically. Trade volume decreases typically means the stock is weak, and its price may rise or drop rapidly. These are general rules, so you will need to do further research into a stock’s performance over several trading sessions.

Reading too much into trade volume

Trade volume does not provide enough information on its own to help you make wise investing decisions or understand why there is movement in a stock’s price. Using trade volume may be helpful with short-term day trading, but it is not helpful for long-term investors. Long-term investors prefer to look at a company’s finances and operations to gauge the strength or weakness of its stock.

What is a trade volume chart?

Investors typically use bar charts to track trading volume. The most common chart that investors use is the Price-by-Volume (PBV) chart. This chart tracks stock volumes at different share price points.

What are the indicators of trade volume?

Trade volume indicators help investors understand how trading volume affects the price of a stock and make decisions accordingly. There are several volume indicators that you can use, including the OBV Indicator, Volume RSI, Volume Price Trend Indicator, and the Chaikin Money Flow Indicator.

Whether you are a day trader or a swing trader, understanding how trading volume affects the price of stocks can help you become a better stock trader.

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