According to financial analysts like Kavan Choksi Singapore, volume refers to the number of shares traded during a given period of time. For example, if 100 shares of Company XYZ are bought and sold in a single day, then the daily trading volume for Company XYZ is 100.
Similarly, the daily trading volume for the entire stock market can be calculated by adding up the number of shares traded for all companies listed on exchanges in a single day. The New York Stock Exchange (NYSE) is the world’s largest stock exchange, so the NYSE’s daily trading volume is often used as a barometer for global stock market activity.
Why is volume important? Because it can be used to identify potential changes in a stock’s price. Generally speaking, an increase in a stock’s daily trading volume is seen as a bullish sign, while a decrease is seen as a bearish sign. Of course, there are exceptions to this rule (e.g., a company could issue a press release announcing bad news, resulting in higher-than-normal trading volume as investors sell off the stock), but generally speaking, increased volume is seen as positive, and decreased volume is seen as negative.
How to Use Volume to Your Advantage
Now that you know what volume is and why it matters let’s look at how you can use it to your advantage. There are two primary ways to do so:
Look for stocks with unusual increases or decreases in trading volume.
As we mentioned before, an increase in trading volume is usually seen as positive, while a decrease in trading volume is seen as negative. However, there will be times when a stock sees an unusual (i.e., out-of-the-ordinary) increase or decrease in trading activity. When this happens, it’s important to take a closer look to see what might be driving the move.
For example, imagine that Company XYZ typically sees 50,000 shares traded per day but suddenly sees its daily trading volume skyrocket to 10 million shares. In this case, something significant has happened (or is about to happen), and it’s likely that the stock price will move soon as well. If you can identify the reason for the change in trading activity—say, an announcement that the company has developed a new groundbreaking product—then you may be able to make some money by buying shares before the price starts moving higher.
Look at changes in average daily trading volume over time.
Just like you can track changes in a stock’s price over time by looking at historical price charts, you can also track changes in volume over time by looking at historical “volume charts.” These charts plot changes in volume on a timeline just like regular price charts plot changes in prices on a timeline.
Closing Thoughts
Daily trading volume is simply the number of shares traded during any given day. It’s important because it can be used to identify potential changes in stock prices. You can use volume to your advantage by looking for stocks with unusual increases or decreases in trading activity or by tracking changes in average daily trading volume over time. By doing so, you may be able to make some money by buying or selling shares before prices start moving up or down.