What Is Volume And Why It Matters
Volume is the number of shares traded in a stock or ETF during a given period of time.
Examples of Volume:
On the above date, Apple (NASD: AAPL) traded more than 60M shares. For a transaction to occur a buyer and seller must agree on the price. In this case, over 60M shares of Apple were exchanged during the course of the day.
If you’re an active trader you’ll want to trade stocks that have a fairly decent amount of volume. The more heavily traded a stock or ETF is, the better the liquidity and spreads.
For example, check out the chart below:
Grupo Aeroportuario del Sureste, S. A. B. de C. V. (NYSE: ASR) is a thinly traded stock. On the above date it traded about 91K shares of total volume. That said, if you look at the bid/ask spread, you’ll see that it was 164.40 by 185.38. A spread that wide makes it unattractive to traders. Imagine being long the stock and a negative headline on it hits, you’ll get crushed in slippage.
Another reason why thinly traded stocks are unattractive for traders is that its hard for them to size up on them. If a stock or ETF does over 20M in total volume, a trader can put on positions exceeding 50K shares without worrying about slippage.
How Traders Use Volume
For the most part, stocks will trade more shares if there is a catalyst. A catalyst could be an earnings release, an analyst recommendation, a research note, press release, or anything else that is new information about the stock.
One way traders compare if a stock is active or not is by comparing it to an average.
On the above date, the SPDR S&P 500 ETF (NYSE: SPY) traded over 143M compared to 101M (30-day average).
Day traders will incorporate volume analysis to see if a stock is breaking down or about to head higher. A lot of strategies are based around following price action and volume.
The ability to analyze volume is extremely important to traders. Investors also need to be aware about it as well. They don’t want to be tied up in an illiquid product if they need to free up funds.
Most brokerage trading platforms have volume analysis on its charts and indicators. These are worth exploring as you continue your education on the subject.