The Basics Of Volume
Updated on March 13, 2019
Volume is the number of shares traded of a stock or stock exchange in a specific time period. Primarily, volume is shown as a daily calculation. The volume of a stock is usually displayed as a single number in the summary section of a stock’s profile or as a bar chart directly under a stock’s price chart.
How is Daily Volume Calculated?
When a trade happens, there must be a transaction between two investors. One investor buys the stock while the other sells the stock. Each share traded between the two investors counts once towards the total volume for that day. With thousands to millions of shares traded between investors each day, the daily volume of a stock or stock exchange will increase throughout the day until the market closes. The daily volume will then reset to 0 once the next trading day begins. Let’s show this with an example.
If you buy 10 shares of a stock, another investor had to be willing to sell 10 shares of that same stock. Since volume only counts how many shares were exchanged in a trade, this trade will cause the volume for that stock to increase by 10. If you were to sell your 10 shares later that day, the volume of the stock would again increase by 10.
How is Average Volume Calculated?
Volume can also be shown as an average over a specific amount of days. For instance, if these were the daily volumes for a stock over the past 10 days, the 10-day average volume would simply be the sum of these numbers divided by 10.
So Why Do These Volume Numbers Matter?
Volume is important because it shows the liquidity of a stock, or in other words, how easy it is to trade the stock for cash. A high volume stock means the stock is very liquid because many investors are trading it. A low volume would mean the exact opposite. Comparing the daily volume of a stock to its average volume can be very useful. Since average volume gives you an idea of the usual volume of a stock, if the daily volume is significantly higher or lower than the average, this could mean investor interest in the stock is changing.
For example, if the average volume for a stock is 500,000 over the past 30 days but today the volume is 1 million, this could mean investors are now more interested in trading the stock. If instead today’s volume was 200,000, this could mean that investors are currently less interested in trading the stock.
This comparison gives you an overview of the activity in a stock but doesn’t necessarily tell you which direction the stock is headed. To help determine that, investors also use volume in combination with technical analysis techniques.