The financial sector refers to stock volume as the measure of stock exchange transactions that occur during a particular trading period. Sell and buy transactions both contribute to overall stock volume. Traders use data from the two to determine market volatility and to make predictions about future stock price adjustments. Both sell and buy volumes are of equal importance, as the two work together to provide clues about the strength of individual stocks and the overall market.
Buy and Sell Volumes
Sell volume equals buy volume for every stock in the market, because a trader cannot sell a stock for which there is no buyer. A trader or his broker can place a buy or sell order for a stock. But that order will not count toward volume until another trader reciprocates the transaction. Consequently, high stock volume indicates high liquidity, meaning shareholders can buy and sell stock easily.
Major stock indexes, such as the Nasdaq, Dow Jones Industrial and S&P 500, post daily volume information on their respective websites. Newspapers and financial publications also publish stock index volume information. However, investors interested in identifying volume for individual stocks may do so by contacting a broker or financial adviser. Additionally, publications that issue or publish stock charts will identify volume information alongside stock prices. Volume information published in red indicates the stock closed with lower volume than in the previous trading period.
Volume provides stock information based on its relationship to share prices. For example, when volume increases, and share price subsequently increases, it signals greater demand for that stock. On the other hand, volume increases that drive market prices down indicate an increase in the number of investors eager to sell their stocks.
Unexpected volume occurs when investors trade a stock much more aggressively than usual. This often occurs following quarterly earnings reports, world events and shareholder announcements. Investors often associate unexpectedly high stock or market volume with increased volatility, meaning the stock’s current price will likely continue changing so long as volume remains high.
Traders can take advantage of volume information to determine the most profitable times to buy and sell stock. High stock volume that corresponds with a price increase can indicate that the price will likely continue rising, providing investors with an opportunity to buy low and sell high. Alternatively, investors experiencing falling share prices along with high volume might want to sell the falling stocks to avoid major losses.
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