Trading volume

Quick definition

Trading volume is the amount of people buying and selling an asset over a given period of time.

Key details

• Trading volume helps us to gauge how much the market is interested in an asset
• Volume is shown on a price chart by vertical bars underneath the price information
• Trading volume combined with price changes can give a trader an overview of the current position of a financial asset

What is trading volume?

Trading volume refers to the number of shares traded in a stock or the broad market in a given day, week, or larger unit of time. Every day, computerized systems track the number of shares traded in every stock, as well as the number of shares traded on every stock exchange in the world. You’ll usually see volume depicted as vertical bars underneath a price chart. 

Why is trading volume important?

By combining both price and volume fluctuations, you gain a better understanding of the stock’s trend direction. A stock that goes up or down to price only tells half the story; volume tells the other half. 

Let’s say that a specific stock trades an average of 1 million shares a day. If that stock jumps 5%, and volume doubles to 2 million shares that day, that’s a sign that institutional investors such as mutual funds are likely buying shares, indicating strong support. Conversely, if a stock falls 5% as volume doubles to 2 million shares, that’s a sign that institutional investors are likely selling shares, a sign of weakness.

The same principles apply on lighter-than-normal volume, just in the opposite direction. Say a stock surges 5% in price on a given day, but trades only 500,000 shares (half its average daily volume) that day, that shows there’s not much conviction behind that price gain, leaving the stock vulnerable to a sharp drop. Likewise if a stock falls 5% in much lighter than normal volume, that’s not necessarily a bad sign, and could instead just be a momentary pullback on the way to future gains.