The second most important number when looking at a stock is the volume calculation. While the actual cost of each share is important, watching how the volume is moving will show how much interest there is in the particular stock. The higher the volume, the more interest is being generated — and the lower the volume, the less interest is taking place.
When looked at on a chart, volume basically shows the interest level in a stock. If there’s high volume at work, there’s a lot of interest in the stock. On the other hand, if there’s hardly any volume, that shows there isn’t a lot of interest in the stock. It is a measure of emotion on a stock. Volume is calculated using a series of complicated formulas based on the stock price and the number of shares being traded.
Stock volume also indicates the amount of stock liquidity at work. Liquidity shows how easy it is to buy and sell shares of the stock. If the stock is trading at a low volume, that means stock traders aren’t interested in it, and it's difficult to find a trader who could either buy or sell the stock. On the other hand, when a stock is showing high volume, it’s easy to either buy or sell it.
Volume becomes useful to an investor when it is examined in conjunction with price. Investors who study volume charts look for things such as “churning,” which is when a stock suddenly has a very high volume but a very narrow range. A stock might be trading at the same level for a month or so, and then suddenly it begins to trade at a high volume. This shows there is sudden interest in a stock, and when that happens, the share price tends to rise, even if there is no logical explanation for it.
However, churning can also take place when a broker buys and sells shares in an account simply to score some quick commission dollars. Churning can signal that there is activity in a stock that previously had been stagnant. The price is factored into finding the stock volume movement.
The vertical lines that can be found at the bottom of a display of stock prices are the volume display. This shows the trading volume for a particular day. Investors attempt to use the volume of a particular stock and compare it to the displayed volume for the entire day as a means of predicting how a particular stock is doing. More than anything, displays simply show an investor when the stock market is running high and do not have any bearing on an individual stock.
The main thing that stock market volume calculations are used for is to determine when a stock should be bought or sold. For example, if a volume calculation shows that shares of the Widget Co. are trading higher than they’ve ever traded before, investors will assume it’s a good time to get on board, since the stock is likely to go higher. Conversely, if shares of Widget are trading lower than they ever have, investors might well decide to sell them, fearing the stock will lose even more value with time.
- Learn to Invest: Stock Market Volume
- Swing Trade Stocks: How to Interpret Volume on a Chart
- U.S. Securitites and Exchange Commission: Churning
- Guppy Traders: Equi-Volume and On Balance Volume
- Management Paradise: Role of Volume in Stock Market
- Vanguard. "Understanding ETF Liquidity and Trading," Page 1. Accessed April 22, 2020.
- SEC. "Ask Price." Accessed April 22, 2020.
- SEC. "Bid Price." Accessed April 22, 2020.
- Vanguard. "Understanding ETF Liquidity and Trading," Pages 1-3. Accessed April 22, 2020.
- Charles Schwab. "Trading Volume as a Market Indicator." Accessed April 22, 2020.
- Corporate Finance Institute. "What Is Volume?" Accessed April 22, 2020.