Trading Volume

Trading volume is the number of shares transacted in a security over a given period of time, usually a day. It is essentially the quantity of the security traded in the market and can be calculated for stocks, futures, options, bonds, foreign exchange, and commodities. As there is a seller for every buyer, one way to think of trading volume, at least for stock, is as half the number of shares transacted: if person A sells 100 shares to person B, the volume is 100 shares. However, some markets measure volume differently. For example, the NASDAQ counts each side of the trade and so the volume would be 200 shares. We can also sum the volume of individual securities in a market and obtain a measure of overall market volume. The latter provides a useful measure of quantity analogous to a market price index.

An Important Indicator

Along with the price of a security, volume represents one of the most basic and important indicators of activity, for the security itself and the market as a whole. The trading volume gives investors a sense of the amount of activity in the security or the market during the day, and may provide signals to their future course. For example, increasing volume can be an indication that prices in the market will increase in the future. Simultaneous increases in prices and volume are an even more bullish (positive or buy) signal. On the other hand, decreasing volume is an indication that prices may fall in the future. A combination of falling prices and volume is then a bearish (negative or sell) signal for future prices.

Volume in financial markets tends to grow as the number of market participants (buyers and sellers) increases with the size of the market (for stocks, measured in terms of capitalization). For example, the New York Stock Exchange (NYSE) had a daily share volume of 1 million in 1886 and this had grown to 10 million in 1929, 500 million in 1987, and 5 billion in 2007: the highest volume day was 5,799,792,281 shares on August 16, 2007. Large trading volumes also tend to coincide with daily market record highs and lows. This need not be the case for an individual security: if the liquidity of a security is low, very large changes in price require only small volumes. Volume is also used to measure the share of trades conducted [Page 1607]in different markets. For example, NYSE-listed securities are traded on the NYSE and in other markets (like NASDAQ), and their respective shares of trading volume can be used to identify which of these markets are relatively more important.

Technical Analysis of Volume

One area where volume is enthusiastically used is in the area of technical analysis. This is a financial markets technique that claims the ability to forecast the future direction of security prices through the study of past market data, including price and volume. Technical analysis considers only the actual price behavior of the market or security, on the assumption that the price reflects all relevant factors before an investor becomes aware of these through other channels. This contradicts the weak form of the efficient market hypothesis that states that current market prices incorporate all historical market information.

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