Trade Volume: What Does It Mean?
The total number of shares or contracts traded is the definition of the security’s volume of trading. It is applicable to any security that changes hands during the trading day.
All commodities, equities, bonds, options contracts, and futures contracts are measured for trade volume or trading volume.
KEY POINTS
- When discussing a security’s daily trade volume, we’re referring to the total number of contracts or shares bought and sold by investors.
- The volume of trade is a proxy for the energy and fluidity of a market during a certain time frame.
- The more volume there is in a market, the more liquid it is and the better orders can be executed.
Understanding Trade Volume
The total number of shares or contracts traded in a security during a given time period is the volume of trade for that security.
The sum of the shares bought and sold by each buyer and seller is included. The volume of trades in a security is high when trading in that security is robust, and it is low when trading in that security is light.
FACT
The beginning of the week and the conclusion of the week, as well as the times when the market opens and closes, see the most activity.
How Trade Volume Works
Market volume is monitored and reported by each individual exchange. Numbers relating to the volume of trades are reported as frequently as once an hour during the current trading day.
The hourly trading volumes mentioned here are approximations. The sum of the day’s trades is an estimate, as is the sum stated at the conclusion of the day. The following day, definitive actual numbers are released.
Since prices tend to fluctuate more frequently with a higher volume of activity, investors may also track a security’s tick volume, or the number of changes in a contract’s price, as a proxy for trade volume.
The volume of trades in a market provides insight into the health of that market. When there are more transactions involving a certain asset, the market is more liquid, orders are executed more quickly, and there are more potential buyers and sellers to choose from.
Options and futures on specific assets, as well as the underlying futures market, tend to see increased volume when investors are uncertain about the direction of the stock market.
In general, volume is highest just before and after market hours and on Mondays and Fridays. Lunchtime and the days leading up to holidays tend to have the lowest.
Exceptions and Cautions
High-frequency traders and index funds have recently emerged as a significant force in the overall trading volume of U.S. markets.
A 2017 study by JPMorgan found that “fundamental discretionary traders” (investors who consider all of the relevant factors affecting a stock before making a decision) accounted for only 10% of total trading volumes, while passive investors like ETFs and quantitative investment accounts that employ high-frequency algorithmic trading accounted for 60%.
Investors and Trading Volume
In technical analysis, traders consider a wide range of trading elements. The volume of trades is one of the most basic technical indicators considered by market participants.
For this reason, traders pay close attention to the volume of trades that occur when prices dramatically rise or fall.
A security’s value can be bolstered by high volumes that coincide with price movements in the same direction.
Traders can use volume levels to make better decisions about when to make a trade.
When deciding when to enter or exit a trade, investors look at the short-term and long-term average daily trading volume of a security.
There are a number of volume-based technical analysis indicators available to traders. The trading of securities is controlled by the Securities and Exchange Commission (SEC).
Under Rule 144, sellers are restricted from selling more than 1% of the outstanding shares of the same class.
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Examples
Let’s pretend there are two traders, Trader 1 and Trader 2, in a market. The first investor gets 250 shares of XYZ stock and 500 shares of ABC.
These 500 shares are sold by the second trader, who then purchases 250 shares of stock XYZ from the first trader.
There are a total of 750 shares trading hands at the market, 500 of ABC and 250 of XYZ. This is due to the fact that we do not count a transaction twice, such as when Trader 1 purchases 500 ABC shares from Trader 2.
Similarly, if only 250 XYZ shares were traded, that would be reflected in the volume statistics.
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