What Does Trade Volume Mean?

At Money Runners Group, we pride ourselves on educating our clients – and the general public – on the ins and outs of successfully investing in stocks, whether you are interested in purchasing one share of Berkshire Hathaway, or investing in the hottest penny stocks. Our penny stock advice is pretty simple: Principals of sound investing transcend all markets. If you apply time-honored methodologies, educate yourself, and utilize common sense, you could turn a profit no matter what type of stocks you invest in. With that in mind, we would like to talk a little bit about trade volume, specifically, what does trade volume mean?

Here is a simple definition: Trade volume is the amount of shares traded among parties in a certain period of time. In many cases, the time frame is a single day, but it also can be much longer, like a week or month. It is a term that is commonly used when talking about the stock market or other financial markets, and for traders it may not seem an important statistic on the surface. But do not be fooled by the simplicity of the definition, as trade volume plays a vital role in the stock market and how it operates. How so? Because it takes into consideration securities that are bought and sold, meaning trade volume paints a picture not only for the overall market on a particular day, but for an individual stock.

Trading volume is important because it tells you how significant a price shift is, and gives clues as to how legitimate those shifts may be. Here is an example: Company A and Company B is both worth $12, but suddenly gain $5 in one day and close at $17. If the volume of Company A was 1,000,000 shares whereas the volume of Company B was only 10,000 shares, there is a much bigger shift in Company A. This could mean that the stock for Company A caused a much greater increase in investor confidence. A key here is to keep your eyes open and sniff for a pattern. If the same scenario with the same two penny stocks continues to play out, or Company B peters out a bit, then stock in Company A may be worth than a passing glance. As trading volume increases, so does the amount of investor interest – many of whom may decide to get involved, continuing to drive the price up even further. At this point, you have to ask yourself: Should I get involved now? And if I invest, am I confident this pattern will continue, making my investment worthwhile enough to sell?

Here are some other penny stock tips to consider.

As trade volume rises, so does the liquidity for traders. Remember, liquidity refers to the degree to which a stock can be bought or sold without affecting its price. If the volume is light, it may be problematic to find another party to trade against at an attractive price. Translation? You may have to buy at a price higher than you expected to originally. Again, look for patterns.

This is something else to watch for with trade volume. In many cases, trade volume for large companies may spike up to four times each year, coinciding with quarterly earnings reports. If these reports, and related announcements about the health of the company, are positive, a price increase will follow.

Finally, remember that penny stock trading does not occur in a vacuum. Trade volume and other tools at your disposal, such as the relative strength index, can be important in investing success. Do not dismiss anything that can give you an advantage.

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