Investors monitor stock volumes to validate market trends when deciding which stocks to invest in, and they may assist you in making decisions about what to buy (or sell) for your portfolio. For example, based on your needs and objectives for investing, transaction volume may indicate that you should buy when there is a lot of activity in the market or sell when there is less activity.
Why Do Markets Trade Volume?
A measure of a security’s trading activity over a predetermined period is its trading volume. Volume is frequently monitored daily by traders. Yet they also track trade volume over a range of time durations, whether short or long. For instance, you may examine trade activity over the past 30 days or the entire year.
Trading volume transactions have two sides: the buy side and the sale side. For example, consider selling 500 shares of XYZ stock. If another purchaser purchases them, there will be 500 shares traded overall rather than 1,000. The price of a stock and volume are correlated because trading activity might change in response to changes in share prices.
Stocks with a high and low volume
Based on their trading activity, stocks can be classified as high volume or low volume. More trades occur on high-volume stocks. Low-volume equities, however, are more sparsely traded. There needs to be a clear line that separates the two. On the other hand, high-volume equities often sell at a volume of 500,000 shares or more each day. Low-volume stocks would stay within that threshold.
High Volume Stocks: Advantages and Drawbacks
Reduce volatility: A stock trading at a larger volume tends to be less volatile. This implies that significant price fluctuations throughout a trading day are less likely. In addition, the fact that more people are investing in equities might reduce your risk factor.
Narrow spreads: The difference between the bid and ask prices is often significantly less for high-volume equities. When the seller sets an asking price, a bidder prepares to pay a bid price. For investors, smaller spreads mean more buying and selling possibilities.
Reduced liquidity risk: The ease with which you may turn your assets into cash is measured by liquidity. More investors often engage in high-risk trading.
Low Volume Stocks: Advantages and Drawbacks
More opportunity: Companies with low trading volumes may offer investors greater possibilities. Simply put, such stocks decrease demand. For instance, value investors may profit from inexpensive equities. Over time, the value of those stocks could rise. Growth investors can also come upon a chance to pick up a cheap stock that is headed higher.
Possibility for more volatility: Stock prices may become more susceptible to volatility due to lower trading volume. In other words, a stock that trades less often than one that consistently trades hundreds of thousands of shares daily is more likely to see significant price movements.
By monitoring volume, you may obtain a sense of the market’s overall direction. You may dig deeper to see what’s spurring more trading activity if the total volume rises. You should pay close attention to how prices are changing to trade volume. A change in the market may be occurring or about to happen when prices move quickly up or down on rising or falling volume.