Trading volume measures the number of shares or contracts of a security traded during a defined period of time. Increases in volume can indicate significant changes in price, such as earnings reports or important news. Institutional investors may also cause spikes in volume. Trading volume is a useful tool for technical analysis.
Trading volume, sometimes simply referred to as volume, refers to the number of shares or contracts of a security traded during a defined period of time. Most often, trading volume is measured on a daily basis, but depending on the security being traded, volume may be measured over longer time frames, such as a week or a month. For example, if investor Bob has bought 5,000 shares of XYZ Corporation, he has increased the volume of XYZ by 5,000 per day. If investor Bob had sold 5,000 shares of XYZ Corporation, he too would have increased his volume by 5,000 for the day.
When investors or financial analysts see a large increase in volume, it can indicate a significant change in the security’s price. If trading volume increases significantly four times in a given year, that usually indicates when quarterly income statements were released for a company. Significant gains and losses will usually lead to a movement in the trading volume of that stock. When profits are announced, spikes in trading usually indicate warm and fuzzy feelings about investor safety, and losses usually send investors to their brokers to abandon their underperforming safety before they realize a considerable loss.
In addition to earnings reports, significant volume spikes can indicate some type of important news taking place. For example, predictions of an increased corn crop, followed by record spring rains and flooding, decreased the normal supply of corn, which will increase demand and, in turn, increase the price. As a result of the floods, speculators and investors rushed to their commodity brokers to buy corn futures at a higher price, causing a significant increase in corn futures trading volume.
Institutional investors in large brokerage firms buy and sell securities in large blocks when they invest for their clients. When analyzing trading volume, you may see an increase in volume that is not explained by earnings reports or the news cycle. These spikes are likely to be the cause of the large trades made by institutions.
Although volume is a very simple measure, the average person or novice investor may not understand how useful this information can be. Trading volume is a powerful market tool used for technical analysis. Movements in volume can indicate investor sentiment, important events taking place in the market, or institutional trading of the security.
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