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What Causes Drop in Volume in Stock Market?

Table of Contents

What is Volume in Stock Market?

What Causes Drop in Volume in Stock Market?

Conclusion

Do you want to know what causes drop in volume in stock market? The domain of stock trading is a dynamic one and it is important to have a proper idea about different market indicators in order to make informed trending decisions. ‘Volume’ is one of the vital indicators in the stock market. Volume in stock market means the total amount of shares which have been traded during a particular span or duration of time. It is a basic but robust indicator that offers insights into the liquidity and intensity of trading activity for a specific stock.

Volumecan be quite useful while making important trading decisionsin stock market. Read and find out what causes drop in volume in stock market and how you can use the knowledge to trade more safely.

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What is Volume in Stock Market?

Volume in stock market helps measure training activity and interest of investors in specific stocks. If there is a high volume, it means there is high amount of interest in a stock whereas a low volume indicates the contrary. When the price of stock rises with high volume for the same, it indicates that the upward trend for the stock is robust and it is likely to hold. On the other hand, if the price of stock drops on high volume, it is indicative of a strong downward trend.

Also read: How Has the Indian Stock Market Performed in the Last 10 Years?

In the most basic sense, the calculation of volume in stock market is done by adding up all the stocks purchased and sold over a specific duration – generally during trading day.

For example, if hundred shares of a company are sold by one trader and another one buys the same, the volume for that stock would be 100.

Resistance and support levels can easily be identified by volume. Support level refers to a price point in which a stock is shown to stop falling and bouncing back. On the other hand, in a resistance level, the stock is found to stop rising and going in the reverse direction instead. Stocks that are found to have a low trading volume in stock market are regarded as illiquid. This can make it difficult to purchase and sell them.

It is necessary to keep in mind that drop in volume in stock market must not be ignored. Volume shows maximum effectiveness when used along with other analytical techniques and indicators. For instance, using volume analysis in combination with price trend analysis can offer a comprehensive view about the potential of a stock.

What Causes Drop in Volume in Stock Market?

Drop in volume in stock market occurs due to a wide range of factors:

Negative news and rumors

There can be a spike in the volume of a stock after some big news about the same. If the news indicates that the demand for the stock is going to rise after a period of time or in the near future, there can be a rise in its volume. However, there can be a drop in volume in stock market if there is lower demand for the stock.

With the help of volume in stock market analysis, fraudulent trading activities such as Spoofing and Wash Sales can be spotted easily. In Wash Sales, a stock is sold at a loss and purchased back in just 30 days of making the sale. In case of Spoofing, large stock purchase orders are placed with the aim to cancel them just before execution.

Poor Earnings

If the earnings report of a company is worse or better than anticipated there can be a consequent impact on the volume of its stocks.

For example, if the quarterly or half yearly earnings report of a company shows that it has managed to achieve good growth and profits, its stocks will witness a drop in volume in stock market. On the other hand, a positive report will do just the opposite.

Fear of bad economic growth

A drop in volume in stock market can also happen if there is data in public domain suggesting lack of economic growth at present or in the near future. Quarterly, half-yearly or annual reports of these types are often published by public sector or private sector organizations. These are found to have a tremendous impact on stock volume.

If there is a rise in volume during a rise in price of stocks, it is reflective of very positive sentiment of buyers about the same. It can indicate that the upward trend is likely to hold. On the other hand, if there is a drop in volume in stock market during rise in price it could suggest that the upward trend is going to end.

No festive events or drop in purchase

A drop in volume in stock market can also occur when there is a drop in buying activities. Some stocks are found to experience more intense trading at specific times of the year. For example, retail stocks frequently witness higher volume of trading during the holidays.

Also read: Stock Market Manipulation in India 2024: Top Things to Know About.

This is quite natural, given that people like to purchase more during festivals like Christmas, Diwali, Eid etc. There is a consequent rise in retail stocks due to greater buying activity by more number of consumers. There can be a drop in volume in stock market if there is no festive event or in case there is a reduction in purchase activities.

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Conclusion

All in all, Volume in stock market happens to be an important component of analysis of the market. It offers important insights into potential reversal points, trend strength and market activity. However, similar to all other indicators, it comes with its own drawbacks and needs to be used along with other strategies for broader analysis. A drop in volume in stock market can occur due to various factors, and you should know all about these.

It is always important for you to carry out comprehensive research and take these important factors in consideration before making decisions about trading. You should get enough knowledge about what causes drop in volume in stock market, so as to go ahead with your trading activities with full confidence.

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