By Rebecca Lake
When determining which stocks to invest in consider trading volum among your criteria. For example, you might decide to focus on high volume stocks. You may prefer lower volume when making investment decisions. Tracking stock volumes can help you choose what to buy (or sell) in your portfolio.
What Is Trading Volume?
Trading volume is a way to measure how often a security trades over a set period of time. Traders often measure volume on a daily basis. But they also measure trading volume over shorter or longer time frames. For example, you might analyze trading volume over the previous 30 days or year to date.
There are two sides to trading volume transactions: the buy side and the sell side. Say you sell 500 shares of XYZ stock. If another investor buys them, the total trading volume is 500 shares, not 1,000. Volume has a correlation to a stock’s price: Trading activity can fluctuate as share prices increase or decrease.
For example, trading volume may pick up if political or economic fears trigger a sell-off. On the other hand, if volume increases along with prices then that may signal a strong market.High Volume Stocks and Low Volume Stocks
Stocks can be categorized as high volume or low volume, based on their trading activity. High volume stocks trade more often. Meanwhile, low volume stocks are more thinly traded. There’s no specific dividing line between the two. Howerver, high volume stocks typically trade at a volume of 500,000 or more shares per day. Low volume stocks would be below that mark.Pros and cons of trading high volume stocks
There are a few ways that trading volume can help with evaluating stocks and broader market trends as a whole.
For example, tracking volume can help you get a sense of where the market is going collectively. If the volume is on the increase overall, you can go deeper to analyze what’s driving higher trading activity. Specifically, you’d want to look at how prices are moving in connection with trading volume. When prices move up or down sharply on increasing or decreasing volume, that can signal that a shift is happening or is about to happen in the market.
That, in turn, can help with determining when to buy or sell. For example, in a market environment where prices are falling and volume is increasing, you may decide to buy in to try and profit when the market recovers and prices start rising again. Or you could decide to sell off some of your stocks to minimize losses.
Trading volume can also send signals about whether the market is trending bullish or bearish, or whether a particular stock is likely to have a breakout movement. Breakouts happen when a stock’s price moves above a certain level. If the higher price holds, a breakout may follow. Trading volume can also help you pinpoint potentially false breakouts when a stock is signaling that it’s share price is about to increase but it actually isn’t.The Bottom Line
Trading volume is just one way to evaluate stocks when deciding whether to buy or sell. This technical indicator may be more helpful for decision-making with day trading strategies, versus evaluating stocks or mutual funds to invest in for the long-term. If you’re using this metric to compare stocks, remember to consider the bigger picture in terms of historical performance and other factors that could be impacting the markets.Investment Tips
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