VOLUME – PART I
By Michael Craig
When investors first become involved with checking the prices of their stocks, they look at the current price, and that is enough to satisfy their needs. As time goes on and they learn more, they begin looking at additional information such as the bid and ask price, day high and day low, percentage gain or loss, and especially volume. Volume gives the investor additional understanding concerning the stock’s movement.
Volume, by definition, tells you how many shares are traded for a particular stock during a given period, and is usually presented next to the stock quote. For example, XYZ Corp may close at $50 a share, and near the quote you will see a listing for volume, which states 2,500,000. This means that during the day, 2,500,00 shares of XYZ were traded. A buyer and a seller count as one sale, so if 100 shares are transferred from a seller to a buyer, volume increases by 100. Additionally, volume can represent how many total shares are traded for an entire market during a given period. You may hear that the Nasdaq closed up 50 points on volume of 1.5 billion. This means that 1.5 billion shares exchanged hands during the day.
As a general rule, heavy volume (more shares traded) is a stronger indicator than lighter volume. Heavy volume means that there is more activity than the stocks “average volume”, while lighter volume means there is less activity than the stock’s “average volume.” A stock may move up or down on heavy volume, or it may move up or down on light volume.
Volume does not necessarily impact the direction of the stock’s movement, but it does tell you tell you how strong the move was. A stock moving up on heavy volume is a better sign than the stock moving up on light volume. The reason for this is that heavy volume means that more buyers than normal are coming in and driving the stock price higher. If the volume was light, then fewer buyers than normal are coming in to bid the price higher. Conversely, a stock moving down on light volume is a better sign than the stock moving down on heavy volume.
The volume indicator is often linked to the overall market and not just an individual stock. However, the principals are much the same. If the market moves higher on heavy volume, it is a much better sign that if it moves higher on light volume. Once again the opposite is true if the market is moving down. If the market moves down on lower volume, it is a more bullish indicator than if it moves down on heavy volume (bearish indicator).
Essentially volume tells you how much activity a stock or the market had during the day. The higher the amount of activity, the stronger the move, whether it be up or down. Just looking at the closing price for your stock, or just looking at whether the market is up or down, does not tell you the whole story. Investors need to know and understand how strong the moves are, and that is what volume provides.
