Question: Would you explain what a stock's trading volume is? Is it important for the average investor?

Jane T
Answer: Dear Jane T,
I'm pleased you asked about trading volume. It's a key figure that many individual investors ignore
because they're focused, understandably so, on a stock's price.
A BASIC DEFINITION
Volume is the number of shares traded in a stock for a given period, typically for one day. When trading is
lighter than usual, it is said to be "thin." When there's more trading than usual, it is called "heavy trading."
Volume is the basic fuel of the market since stocks move up or down in price only when shares are
trading hands.
FINDING A STOCK'S VOLUME
In the newspaper...
You can find a stock's trading volume for the previous day in the financial pages of most newspapers. It's
under the column labeled: VOL.
$TIP: A number of newspapers put the stock quotation in boldface if its priced changed 5% or more from
the previous day. And, they underline the quotation if there were large changes in volume compared with
the stock's average trading volume. These two graphical indications make it easy to spot the stocks in the
news.
On line...
Volume is also reported online and here the information is continually updated (every 20 minutes)
throughout the trading day. On our BUYandHOLD home page, simply type in the symbol of a stock and
up will pop a number of statistics about the company, including the stock's volume. Other statistics
include: current price, yesterday's closing price, 52-week high and low, P/E ratio, earnings
per share, shares outstanding and the exchange where traded.
Another excellent online source is "Investors Business Daily" at: www.investors.com. The 14 stocks with
the greatest volume change each day are listed on the home page. Seven of the stocks listed have had
volume increases and seven have had volume decreases. This is an excellent place to find stocks on the
move, up or down.
WHAT DOES VOLUME MEAN?
(1) Volume gives us some indication of a stock's liquidity -- the higher the volume the more buyers and
sellers out there.
(2) Volume may indicate a special event. Most stocks trade at an even pace for days or weeks at a
stretch -- often until something unusual occurs. Heavy volume may indicate that the company has (or is
about to) released important news. That news might be an earnings announcement, a new product, a
change at the executive level, an acquisition, a merger or a new corporate alliance.
Sometimes, however, trading spikes up and the price subsequently moves up for no apparent reason.

Very often the reason is a major purchase by large institutions hedge funds or mutual funds. So by itself,
a price jump on big volume is not a reason to buy or hold a stock. It's just a heads up that major players
may be accumulating shares.
$TIP: Any investor or fund company that becomes the "beneficial" owner of more than 5% of a stock,
must notify the SEC within 10 days. You can find this information in Forms 13-D and 13-G at: www.edgaronline.com.
(3) Trading volume for one isolated day generally tells us very little. You want to track the average daily
volume of trading over time to see what is taking place, what the consensus is about the stock.
Volume and technical analysis...
Technical analysts also use volume as a barometer of market sentiment. They believe that when a large
number of shares is traded that the stock's price is "accurate" because it represents a consensus
between many buyers and sellers.
Technical analysts use volume also to predict trends. You should not make your personal buy and sell
decisions based on their five basic rules -- but they're interesting guidelines. However, don't take them as
gospel.
1) When prices are going up and the volume is increasing, prices will continue to rise.
2) When prices are going up and the volume is decreasing, prices will either increase at a slower rate or
start to drop.
3) When prices are falling and volume is increasing, prices will fall further.
4) When prices are falling and volume is also falling, then prices will slow down or they will start to
increase.
5) When volume is flat, that is neither rising nor falling, it has no impact on price.
OVERALL MARKET VOLUME
In addition to an individual security's trading volume, there is another popular volume concept known as
"stock market volume." It's based on the fact that the number of shares traded during the day is totaled by
each exchange (and NASDAQ) after it closes.
To see a consensus take hold in the overall market, there must be huge volume -- at least 10% higher
than usual. You may find it interesting to track market volume as well as an individual stock's volume,
over time.
THE TRIVIA CORNER
Stock market volume has changed dramatically over the years.
o In the early 1920s, an active day on the New York Stock Exchange consisted
of a grand total of 1,500,000 shares.
o By the late 1920s, volume averaged 4,000,000 shares a day.

o On October 29, 1929, a record 16,410,000 shares were traded. That figures
was not surpassed for about 40 years.
o Volume trading on the New York Stock Exchange yesterday was 1,063,630,000!!