Table of Contents
Volume in Stock Market: Understanding its Importance
How Change in Volume Occurs Over a Period?
How Volume Can be Used for Making Trading Decisions?
What are the Limitations of Volume?
The world of stock trading is a dynamic world. It is important to understand the different marketing indicators in order to make informed decisions. It is important to understand ‘volume’, which is a crucial indicator of the market.
Volume in stock market means the total amount of shares which have been traded during a particular span of time. It is a simple indicator but a powerful one at the same time. It offers important insights about the intensity of trading activity for a specific stock as well as its liquidity. Read on and find out how volume in stock market is calculated and what important information it reveals about a particular stock.
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Volume in stock market: Understanding its Importance
In very simple language, the calculation of volume in stock market is done by adding up every share that is purchased and sold over a specific period of time, generally during a trading day.
For example, if one trader sells 100 shares of company and these are purchased by another trader, the volume for that specific stock would be 100.
It is important to note that volume acts like a measurement of investor interest and market activity. If there is low volume in stock market it indicates a lack of interest among investors whereas a high volume suggests a high degree of interest in a stock.
When the price of a stock rises with high volume, it indicates that the upward trend of the stock is robust and this is likely to go on. On the other hand, if the price of a stock reduces on high volume, it indicates a strong downward trend.
When it comes to stock trading activities even the slightest error can set you back by a significant measure. It can mean losses in terms of money and your confidence is also likely to take a dent. With proper use of volume in stock market analysis, it can be easier for you to make smart and safe trading decisions.
Also check: High-Beta Stocks 2024 – A Complete Guide for Investors.
How Change in Volume Occurs Over a Period?
Change in volume in stock market can occur due to different factors:
Socio-political events
Various socio-political events can have a major impact on the volume of a stock.
News
Some important news, which could have a relation to the company related to the stock, could also lead to a spike in its volume.
Report of earnings
If the earnings report of a company is worse or better than anticipated, it can have an impact on the volume of the stock.
Economic data
There can also be an increase in volume in stock market if there is some data showing economic growth in the near future.
Seasonal growth
There is heavier trading of some stocks at specific times of the year. For example, retail stocks frequently witness higher trading volume in stock market when there are holidays.
It is very important to understand all these factors to get a proper idea about how changes in volume can occur for a stock. Savvy stock market traders have ample knowledge about these factors and can guide you about how upcoming events and occurrences can have major or minor impact on volume in stock market. You can also check with stock market guides, online training portals and community groups to get a better understanding about the same.
How Can Volume be used for making Trading Decisions?
While making important trading decisions, volume can be a very useful tool for investors. It can be easily used in these ways:
Trend identification
If there is rise in volume during rise in price of a stock, it is indicative of robust buying pressure. It indicates that there may be a continuance of the upward trend.
If there is a drop in volume in stock market during rise in price, it could indicate that the upward trend is going to end.
Identify resistance and support levels
With the help of volume, these levels can be identified. Support level refers to a price point in which a stock is found to stop falling and starting to bounce back. In a Resistance level, however, it is found to stop rising and going in a reverse direction.
Identifying illiquid stocks
Illiquid stocks are those that have low trading volume in stock market. It can be quite challenging to buy or sell these stocks.
Identifying fake trading activities
Volume in stock market can be useful in identifying Spoofing, Wash Sales and other fraudulent trading activities. Spoofing consists of placing big orders with the aim to cancel them before trading execution. Wash Sales include selling of stock at loss and purchasing it back in 30 days.
Also read: Stock Market Manipulation in India 2024: Top Things to Know About.
What are the Limitations of Volume?
Although volume is a useful tool, it has some limitations. High volume is not always a guarantee of the continuation of a trend. There are times when it can suggest a reversal of trends as well.
Volume in stock market can also be regarded as a relative measure. A high volume for a specific stock might be an average volume for some other stock. Naturally, investors often check the volume that is relative to the average volume for the same stock over a particular duration of time.
It is also important to note that volume in stock market must not be used in an isolated manner. It is most effective when it is used along with other analytical techniques and indicators. For instance, if volume analysis is combined with price trend analysis, traders can get a more comprehensive view of the potential of a stock.
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Conclusion
To sum up, volume in stock market is an important component when it comes to stock market analysis. It offers important insights into potential reversal points, trend strength and market activity. As in the case of all other indicators it has some limitations. It is important to use volume as part of a broader analytical strategy.
It is always important for investors to carry out proper research and take multiple factors in consideration before making important decisions related to trading activities. Try to know as much about volume analysis as you can and confidently go ahead with your trading activities.
