Interpreting Stock Volume

Liquidity

• Stocks are generally considered liquid investments. Unlike a house, which can take months or longer to sell, many stocks can pretty much be bought and sold in a matter of milliseconds. Even though stocks can be bought and sold quickly, trading volume determines just how quickly they can be sold for a reasonable price. For example, Apple stock generally sees millions of shares trading hands every day. If you wish to sell it, you can usually sell it at whatever price it is trading at without a problem. But what about stocks that trade only a few thousand shares per day? Chances are, the price will drop quickly when you attempt to sell due to the fact that there are fewer buyers in the market for that stock.
  
  

Price

• Comparing stock volume to the price of a stock offers a great deal of useful information to traders and investors. For example, volume increasing significantly after a stock has been in a continuous down trend may signify that institutional investors are buying, indicating the stock price is ready to reverse higher. When a stock price rises on decreasing volume, it indicates institutional investors are not participating in the move and the price climb is vulnerable to falling in the near future.
  
  

Volume Indicators

• It is often difficult to ascertain if volume represents buying pressure or selling pressure in a stock. Fortunately, programmers have developed various types of volume indicators for stock chart programs that can help investors interpret volume. For example, the On Balance Volume (OBV) indicator reveals when the balance money is flowing into a stock or out of it. Similar indicators include Money Flow (MF) and Accumulation/Distribution (A/D). Most stock chart software allows you to overlay these and many other indicator types over your price chart, helping you to better understand the volume relationship with price.
  
  

Program Trading

• Up to 70 percent of all stock market volume can be attributed to institutional program trading. Banks, hedge funds and other institutional investors use computerized trading systems that buy and sell stocks based on a complicated system of algorithms. The algorithms they use are closely guarded secrets. Trading programs can trade millions of stocks in thousands of companies simultaneously. This is why stock prices tend to rise and fall in tandem as the market indexes rise and fall.