Trading volume and average volume are commonly referenced metrics when looking up a stock quote. Here is an example from Yahoo Finance for Microsoft (symbol = MSFT):
Trading volume is the number of shares that are exchanged/traded on a given day. In the example above, 38.65 million shares of Microsoft were exchanged on that day.
What Is average volume?
As in its name, average volume is the average trading volume over a period of time. In the example above, the average volume for Microsoft of 28.95 million shares is the average daily volume over the last 3 months.
When the day’s volume is greater than average, a change in price (especially a large change) is thought to be more significant than on a day with low volume. In today’s global market with information so widely available, I am skeptical if a “high volume day” is as significant as it used to be. However, there is something to be said for a larger than normal number of trades and market participants “agreeing” to a large price change.
Consider volume before trading a large number of shares relative to the average volume of the stock
Considering trading volume can also be important if you are trading a large number of shares relative to the stock’s volume. This is important, because placing an especially large order for a stock with low volume can change the stock’s price. Given the large size of most companies and relatively small amount of capital that individuals are investing, this is really only a problem when trading stock in a very small company. When trading a stock in a really small company with low volume, you need to be careful about the types and prices of the orders that are placed.
If you have any comments, questions, or ideas for future posts, please let me know
I hope you found this post helpful and educational. If you have any comments, questions, or ideas for future posts, please let me know. You can reach me directly via email at crawford@ulmerfinancial.com.
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