Trading volume - Volume in Stock Market, How do Traders Use it? (2024)

In stock markets, volume or trading volume means the number of shares traded over a particular period. Trading volume is always measured over a specific time period.

What is Trading Volume?

Volume in the stock market means the total number of shares traded in a specified time frame. This would include every share that is bought and sold during the time period in review. Say, 100 stocks of a company were purchased and sold again, in one trading day, the trading volume for that stock will be 200 even though the same 100 stocks are being traded in the market.

Therefore, the volume is the total number of shares that were in action. It could be a buy order or a sell order. Volumes are high when stocks are actively traded. Similarly, volumes are low if the stocks are not actively traded.

Trading volume can be measured for any type of financial instrument: stocks, bonds, derivatives (futures and options contracts), gold and mostly all kinds of commodities.

Stock exchanges publish trading volumes in the share market for each trading session. Volumes are reported for individual stocks and the total volume of all stocks that were traded on the exchange. Volumes can also be reported for indices. Like, it may be possible for us to know the volume of stocks traded on Nifty 50 or Sensex for a particular trading session or any other time frame.

Where Can You Find Trading Volume?

All stock market exchanges track volumes of stocks. Therefore, information on the volume in the stock market of any particular share is easily accessible. One can look at the exchanges, news websites, third party websites that have stock market information. Investors can also check trading volumes with brokers and investment platforms.

Platforms also use candlestick charts to show volumes for a particular time frame. The green bar shows buying volumes and the red bars show sell volumes.

There are also volume charts depending on the time period one wants to keep in mind. There can be hourly volume charts, daily, monthly, 200-day volume charts etc.

Very often the trading volume of a particular stock in the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) will be different. This is also one of the reasons why there might be a slight price difference between Sensex and Nifty 50 for a single stock. Logically, the stock needs to be listed on both the exchanges for this to happen.

What Does Trading Volume Indicate?

• The stock volume shows the action that has taken place in a particular stock. All the activity, be it selling or buying, gets recorded in the volume metric.
• If the stock is showing a lot of volumes, it means that there is a lot of interest or activity happening around the stock. This could be negative or positive. There could be a negative news development that could have promoted more selling. The reverse is also true.
• High volumes indicate the number of times shares have changed hands.

Hence, we can say that volume in the share market measures market activity and liquidity. Liquidity in stocks means the ease with which an investor can get the money back from the investment when there is a sell order or the ease with which an investor can buy a stock. Higher volumes indicate more buyers and sellers in the market.

Within a single trading session, volumes tend to be higher during the market opening and closing as intraday traders are in a hurry to book and close their positions for the day. While investors and traders can use volume as a metric, trading volume analysis is beneficial for short term intraday traders.

Trading volume is a helpful tool for investors using fundamental analysis as well. It can help investors to substantiate any significant movements in the stock over a longer time frame.

Why is Trading Volume Important?

Trading volume is important as it displays an investor's interest in a certain company. It reflects the momentum as well which takes place when a certain sector or stocks are trending on the higher end. It is significant to note that volume also represents the trend when it is on the verge of ending.

Volume And Price: How Are They Related Or Unrelated?

A pick up in trading volumes of stock may have a significant impact on the price of the stock. However, high volumes are always not the reason why the price of a stock moves.

Multiple reasons impact the stock price. Although, a lot of times, volumes do help us to confirm the existence of a particular trend. When viewed together with price rise or market rise, it can be a helpful indicator. If the volumes are really high and coupled with that, the markets are up as well, it may indicate that the stock markets are going pretty strong and healthy.

Therefore, at times, volumes can be a measure of market strength when analysed with other indicators as well.

Let’s understand this better in examples:

• When prices fall with the stock volume going up, it may mean that the trend is going towards the downside
• If markets are going up and the volumes are up too, it may mean that the trend is going towards the upside.

Trading volume analysis, as mentioned above, is beneficial for traders and investors.

Many long term investors, for example, institutional investors like mutual funds prefer stocks with higher volumes. Intraday traders, who have to square-off their position in a relatively much shorter time span, look for stocks with high trading volumes.

While volumes are important, one should also look at other factors before investing in a stock. A holistic decision keeping all factors in mind helps investors go a long way with wealth creation.