Understanding financial trading terms can be difficult to understand, but you have to learn such terms as they play a crucial role in making an informed trading decision. In this article, we will be learning about one of the crucial trading terms: volume in the stock market with examples. We will also cover other topics around volume that may help you understand this crucial term in a better way.
What is Volume in Stock Market?
Volume in the stock market is one of the indicators that shows the number of shares sold and bought during a specified period. It includes each of the shares sold and purchased during trading time. For example, if the 200 shares of ABC Ltd were purchased, then sold, then again purchased and sold out in a given trading time. The trading volume will be 800, even though there were 200 shares.
It shows the number of shares in action and includes buy and sell orders. In most cases, the volume stays higher when the stocks are traded actively in a trading time. Although, there will be less volume if the stocks are not trading actively. This indicator can measure the range of financial securities like stocks, bonds, derivatives, and even gold.
Stock exchanges are responsible for sharing the trading volume of listed shares for every trading session. These metrics are listed for the individual shares, along with the total volume of all the shares that were in action.
Example of Volume in Stock Market
Let’s learn more about volume in the stock market with a simple example mentioned below.
Suppose you purchase 2,000 shares of Punjab National Bank (PNB) at Rs 300 and sell the 2,000 shares at Rs 300. with this trading activity, you and another have created a volume of 2,000 each. In this condition, the other trader would consider the trading volume of 4,000 shares.
How do Traders Find Volume in Chart?
Stock exchanges visually display the trading volumes during the trading day. Volume trading details are generally provided at the bottom of the price chart. They are displayed in vertical format, representing the total volume for the given period. For example, the volume details can be provided for every five-minute interval.
The volume bars are mostly covered in green or red colors. The green color represents the net buying volume for the particular stock. Whereas the red color shows the net selling volume. Many traders consider this measure to find the moving average to determine when the volume is heavy or thin.
Why is Volume Important for Stock Traders?
Volume in the stock market represents the buying and selling trend of traders. In simple terms, it indicates the interest of traders in buying and selling said shares. The higher volume indicates traders have higher interest, whereas lower volume represents the lower interest of traders. The increase in volume may increase the price movements; however, it’s not always required.
Unlike traditional trading, breakout and breakdown do not always look for heavy volume, thanks to today’s algorithms that carefully decide price levels. Many traders execute their trades based on shorting light volume, and later it continues rising. Therefore, traders must think before deciding and consider many other factors. It can be used to figure out traders’ interest in buying and selling particular stocks. One should also prefer other technical analyses along with indicators to make informed trading decisions.
How Does Volume Function?
Volume in the stock market collects the number of transactions that move during trading time. This direct tool figures out the liquidity in the stock market. It shows the daily volume reports and can be used to analyze buying and selling trends of individual stocks and securities as well as the total number of trades being executed in the stock market.
This measure hints at the price momentum when the traders are taking more interest in the said stock and when less. When the market opens, the prices of listed stocks keep moving in the same direction. Using technical analysis tools, the traders decide when to enter and exit the trade, where trade volume plays a crucial role in making this decision.
What Does Volume Indicate?
The stock volume generally shows the interest of traders in a particular stock listed on the stock exchange. It records all trading activities under volume metrics. If the stock has a high volume, traders give high priority or have high interest over other stocks with low volume. The high stock volume can be negative or positive, depending on market conditions.
When negative news comes out about the company, the traders will be more interested in selling the said stock. However, if there is good news about the company, the traders will show their interest in buying a high number of stocks of said company. Therefore, the volume gives the summarized measure of liquidity in the stock market.
How do Volume and Price are Interrelated with Each Other?
The volume can impact a stock’s price significantly; however, it’s not always the same case. High volumes are only one of the factors deciding selected stocks’ prices. The stocks’ prices are also affected by tons of other reasons. However, with the help of volume, we can decide the trends that may affect the price or trade movement of the stock.
Traders can also find helpful insights when comparing price and volume together. If the volume is higher, the market will also go up, indicating that the market is doing well. If you are also one of the traders willing to benefit from market insights, using trade volume and other technical analysis methods can be useful.
Volume in the stock market is very useful to measure for both traders and investors. It hints at the market condition and interest of traders trading in other securities. Using volume can be helpful while investing in mutual funds, executing day trading, and investing in stocks. However, before making any trade decision, using other technical analysis tools will give you more accurate insights to get the most from your trading activities.