Last Updated on September 27, 2023 by BFSLTeam BFSLTeam
When considering investing in the stock market, it’s important to pay attention to trading volume. It is a great concept that will refine your investment journey. You may sometimes find a stock that appears profitable but has low trading volume. The low trading volume should raise a concern and act as a red flag that you are overlooking something that other investors have noticed.
A well-traded stock, which means it has a good trading volume, typically indicates that many people have invested in it during a specific time period. On the other hand, a low trading volume suggests that fewer people are investing in the stock, which should serve as a warning for investors to proceed with caution. Monitoring trading volume in the share market is crucial for making informed investment decisions.
Read on to understand the meaning of volume in the share market, why this information is important to investors and what it tells you about the potential of a stock.
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Volume is a technical indicator that measures the total number of units of an asset traded within a specific period, commonly a single trading day. This metric encompasses both the number of units purchased and sold during that time frame. For example, if a thousand shares of a particular company are bought and then sold on the stock exchange in a single trading day, then the trading volume for that particular stock would be two thousand shares.
Volume in the share market is recorded for all kinds of assets be it stocks, futures, options, bonds and the ETFs (Exchange Traded Funds). It is a key indicator that is often used by both traders and long-term investors to assess opportunities in an asset.
What Does the Trading Volume in the Stock Market Tell You?
The trading volume of an asset reflects its liquidity and the level of interest it garners. When the trading volume for a stock is high, it indicates abundant liquidity and widespread interest. Conversely, a low trading volume suggests limited liquidity and lacklustre interest. Traders and investors typically favour assets with high volumes as they provide greater ease in buying and selling without significant price concessions.
Also Read: What is a Positive Volume Index?
Where Can You Find the Trading Volume of a Stock?
One of the advantages of trading volume is that it is publicly available for free. You can find the trading volume of stocks on your stockbroker’s trading portal or app, the website of stock exchanges and financial portals. Out of the various sources of trading volume for a stock, trading platforms are often the most reliable since they offer updates in real time.
Additionally, most stockbroking platforms also provide volume charts on hourly, daily, weekly, monthly, 50-day, 100-day and 200-day time frames. These charts help you visualise the change in trading volumes and can make formulating investment decisions easier and more effective.
The Relationship Between Volume and Price
Traders often use price and volume to gauge liquidity, interest in an asset and overall market sentiment. Both of these metrics share an intricate relationship. Analysing the trading volume in the stock market can provide context to the price movement. The price-volume relationship can be an important indicator for investors to preempt future trends.
If the price of a stock is going in a particular way and its trading volume is increasing, it is an indicator of a strong demand for the stock. However, if its price is going in a particular direction and its volume is decreasing, it indicates a slowdown in the demand of this particular stock.
Also Read: What is a Negative Volume Index in Stock Market?
Conclusion
Volume in the share market is an important concept that lets you know about the liquidity of a stock and the interest generated by it among other investors. Understanding this concept and being able to identify and interpret it can greatly enhance your trading or investment decisions. By considering the price and the volume of a stock, you will make more well-rounded and informed choices regarding the stocks you are interested in.
You can make informed investments in the market by assessing the volume of stocks. To do this, you also need a demat and trading account. A demat account holds your shares in a dematerialised format while a trading account helps you buy and sell in the stock market. You can open both these accounts with a reliable stock broker and registered Depository Participant (DP) like Bajaj Financial Securities Limited.
