Does Trading Volume Affect Stock Price?
People trade stocks all the time. But when the trading volume suddenly changes, there's often more to it than meets the eye. Learn all about trading volume and how it affects stock prices with our handy guide below.
Trading volume might sound simple, but you'll need to understand the nuances if you're to become – or remain – a successful trader. If you're looking to level up, read our trading volume guide where we cover:
- What is trading volume?
- How important is volume in trading?
- How does trading volume affect stock price?
- Does trading volume include buying and selling?
- Selling volumes
- Buying volume
- What does it mean if a stock has a high volume of trade?
- What does it mean if a stock has a low volume of trade?
- How can you use trading volume to your advantage?
- Improve your stock trading knowledge with Tradu
What is trading volume?
If you're new to the world of trading, you might be wondering what trading volume is.
So, let's get things straight.
Trading volume is quite simply how many investment assets were bought during one day. This includes everything from stocks to bonds, futures and commodities.
The reason trading volumes are monitored by the likes of S&P Dow Jones is for investors. For example, if trading volumes have increased for a certain stock, it's a good indication to potential investors that something is happening.
A sudden change in trading volume normally means one of two things:
- Traders are rushing to buy the asset
- Traders are wanting to sell the asset
How important is volume in trading?
There are a few reasons why trading volume is important to keep an eye on.
Firstly, trading volumes can help you see hubs of activity within the market. For example, if share prices suddenly skyrocket – along with trading volumes – it's safe to assume that traders have spotted an excellent buying opportunity.
Then there's liquidity. If trading volumes are high, it means that traders can buy and sell assets quickly – and arguably more importantly – at a good price.
And finally, on the flip side, trading volumes tell us all about stocks at the other end of the spectrum. For example, if trading volume is unusually low, it normally means that traders will struggle to buy and sell the asset. As such, you can find that prices are less predictable and you might have to sit around waiting for a buyer.
How does trading volume affect stock price?
Trading volume doesn't affect stock price directly, but it does influence how shares move.
Normally, trading volumes increase when there is price volatility in the market. This rollercoaster of unpredictability is an opportunity for investors looking to expand their portfolios.
But it's less trading volume that affects stock prices and more the bid price. For example, if people are buying at the bid price, this normally means traders want to get rid of stock. This pulls the stock price down.
On the other hand, if stocks are going above the ask price, you'll see the value of each stock increase. Why? Because an uptick in volume shows that buyers are eager to purchase the stock as they believe it is destined to increase in value.
Find out more about stock trading and how it works in our in-depth guide.
Does trading volume include buying and selling?
Trading volume takes into account buying and selling. As well as high and low trading volumes, it can be split further into selling volumes and buying volumes.
Selling volumes
If traders are referring to selling volume, this means that those who are selling the assets have more control as the price is lower. Sell volume happens when buyers are paying the bid price.
Buying volume
On the other hand, buying volume is when it's much easier to buy and sell stock. When stock prices are pushed higher, this means that buyers have control. Although it might seem convoluted to describe this as buying volume, it’s a buyers' market as assets tend to be more liquid, making it easier to buy.
What does it mean if a stock has a high volume of trade?
If a stock has a high volume of trade, it might indicate that something has gone awry with that company. For example, high trading volumes normally occur due to news or events that impact the value of the stocks.
But if trading volumes remain high over a longer period, it's a good indication that the value of that particular stock is on an upwards trajectory.
What does it mean if a stock has a low volume of trade?
Although a low trading volume might sound negative, it isn't necessarily. When trading volume remains low, it's normally because nothing out of the ordinary is happening at that company. Traders aren't rushing to buy or sell – it's simply steady.
However, low trading volumes can, in some cases, mean that the stock has lower liquidity, making it harder to buy and sell. If this is the case, you may find that you will have to pay more to buy a stock than to sell it.
And if the volume is slowly reducing over time? It might just mean that traders are losing interest in the asset. So, you should expect the share price to dwindle.
How to use trading volume to your advantage
The best way to take advantage of trading volume is by using it to spot trends in share prices. By looking into trading volumes, you can see which stocks are winning investors over.
If you can see volumes are consistently increasing, it's a good indication that the price of that stock is going to remain high.
Improve your stock trading knowledge with Tradu
If you're ready to start trading, be sure to read our stock trading guides for expert help.
With Tradu you can trade stocks via CFDs or you can own real stocks where you take ownership of the underlying asset.