Stock volume refers to the total number of shares of a publicly listed company traded during a given period, typically over a single trading day.
Other traded securities such as bonds, funds, options, futures and cryptocurrency also possess volume, but the term stock volume specifically refers to the number of shares of a publicly listed company being traded on a stock exchange. Stock volume is an important metric for traders and technical analysis and can be used to gauge market sentiment and investor activity.
A stock's volume is measured by the number of shares that changed hands over the course of a trading day, typically between market open and market close. Stock exchanges will then track trading volume, aggregate the data and report metrics as hourly or daily estimates.
Suppose Trader A lists 100 shares of $ABC for sale at $10 per share. Trader B then agrees to purchase 100 shares of $ABC from Trader A at the ask price of $10 per share. In this case, the trade is counted, and 100 shares will be added toward the total daily volume count of $ABC stock.
It’s important to note that although the same shares may be traded back and forth multiple times during a trading day, each distinct transaction will add to the total volume account for that stock. Using the example above, if Trader B sold the 100 shares of ABC back to Trader A for $9 a share, another 100 shares would be added toward the total daily volume count of $ABC stock.
Another related concept is dollar volume. While stock volume measures the total number of shares traded over a specified period, dollar volume represents the total value of the shares traded. For example, if $XYZ stock had a total daily trading volume of 1 million shares at an average price of $2 per share, the dollar volume of $XYZ stock would be $2 million.
Stock volume can be an indicator of current and impending price movements, whether it be a rally or sell-off. A stock with heavy trading volume and net buys is more likely to see share price appreciation. Conversely, a stock with heavy trading volume but net sells is likely to see its share price fall.
As a result, stock volume is heavily relied upon by traders utilizing technical analysis as a possible gauge of market sentiment, to determine if the price movement of a stock is trending in a bullish or bearish direction in the short term. This trend in one direction or another is called momentum.
Aside from the daily volume, investors can also look at average volumes over longer time periods to get a sense of how the current daily volume fares in comparison. Common measures include five-day, monthly and three-month trading volume. This is helpful for ruling out otherwise illiquid stocks that may have experienced a one-off spike in trading volume.
A notable stock volume record set recently was on Jan. 27, 2021, with over 24.48 billion shares trading hands at $891 billion in dollar volume. One catalyst was the GameStop Corp. (ticker: GME) short squeeze, which saw more than 175 million GME shares traded on Jan. 25. Retail investors from the online forum Reddit piled into the stock to drive up prices, with the goal of forcing hedge funds holding short positions to close out at a loss. This drove what became known as a “meme stock” trading frenzy in a number of other names.
Prior to this, another notable record was set on Feb. 28, 2020, with $989 billion in dollar volume during the height of the COVID-19 market crash. The high volume precipitated a sharp market sell-off, with the S&P 500, Dow Jones Industrial Average and Nasdaq Composite plunging 4.4%, 4.4% and 4.6%, respectively, to close out the trading day, preceding further losses in the weeks ahead.
Investors and traders need to know about stock volume to determine if the stock they wish to trade has sufficient liquidity. Investors attempting to buy and sell a stock with poor volume may find it difficult to connect with a buyer or seller at their desired bid/ask price.
For this reason, stocks with low volume often have wide spreads, which is measured as the difference between the current bid and ask price. Trading in these illiquid stocks can result in poor order execution and losing money to the larger bid-ask spread, called trading slippage.
High-volume stocks tend to be large-cap stocks that trade on stock exchanges with strict listing requirements, such as the New York Stock Exchange (NYSE) or the Nasdaq. Stocks that trade over-the-counter (OTC), like penny stocks tend to have poorer volume and higher spreads.
FAQs
Most trading platforms will display the current volume of a stock at the bottom of a price chart, in the form of vertical bars corresponding to specific intervals of time. Traders can compare the height of this bar to the Y-axis (volume) and its place on the X-axis (time interval) to get a sense of how actively traded a stock is. These bars are usually also colored, with green representing net buying volume and red representing net selling volume.
This depends on the order size. An investor trading a large block of shares (1,000+) should generally seek stocks with high trading and dollar volume to ensure a good entry and future exit price. For smaller orders, volume may not be as material.
The daily volume of an exchange-traded fund, or ETF, is less relevant as ETFs are structured as open-ended funds. New units (shares) of the ETF can be created and redeemed by the fund manager as necessary as investors buy and sell. For this reason, the bid/ask price of an ETF is less affected by supply and demand than it is by the movements of its underlying assets.
