Market Analysis
What Is the Volume of Trade?
Volume of trade refers to the total number of shares or contracts exchanged for a specific security. It can be used to any form of security traded throughout a trading day.
The volume of trading is measured for stocks, bonds, options contracts, futures contracts, and all commodities.
Understanding Volume of Trade
Volume of trade refers to the total number of shares or contracts transacted for a specific securities during a given time period. It contains the total number of shares exchanged by a buyer and seller during a transaction. The trading volume of securities is high when they are actively traded, and low when they are not.
How Volume of Trade Works
Each market exchange monitors its trade activity and offers volume information. Throughout the current trading day, trade volume is reported up to once every hour. The hourly stated trading volumes are approximations. A trading volume recorded at the end of the day is an estimate. The final actual figures are reported the next day.
Investors may also use a security's tick volume, or the number of changes in a contract's price, as a proxy for trade volume because prices move more frequently with a higher volume of transaction.
Volume informs investors of the market's activity and liquidity. Higher transaction volumes for a specific securities indicate increased liquidity, improved order execution, and a more active market for linking buyers and sellers. When investors are uncertain about the direction of the stock market, futures trading volume tends to rise, causing options and futures on certain equities to trade more aggressively. Volume is typically higher near market opening and closing times, as well as on Mondays and Fridays. It tends to be lower around noon and before a holiday.
Special Considerations
Recently, the landscape of trading volume in U.S. markets has been significantly influenced by high-frequency traders and index funds. A 2017 study by JPMorgan revealed that passive investors, such as ETFs and quantitative investment accounts employing high-frequency algorithmic trading, accounted for 60% of total trading volumes. In contrast, "fundamental discretionary traders," who assess fundamental factors impacting a stock before investing, constituted just 10% of the total volume.
Traders and Volume of Trade
Traders incorporate various technical factors in their analysis, and trade volume stands out as one of the simplest yet crucial aspects. Monitoring trade volume during significant price movements is particularly vital as it often signifies key trading catalysts. High volumes accompanying price shifts can indicate strong market activity and reinforce the validity of a security's value.
Moreover, volume levels aid traders in determining optimal transaction times. By tracking the average daily trading volume over short and long-term periods, traders can make informed decisions regarding trade timing. Additionally, traders utilize various technical analysis indicators that incorporate volume data to further refine their strategies.
The Securities and Exchange Commission (SEC) oversees the sale of securities by traders, with Rule 144 imposing restrictions on the volume of securities sold. According to this rule, sellers are prohibited from selling securities exceeding 1% of the outstanding shares of the same class.
Example of Volume of Trade
Let's say there are two traders in a market: trader 1 and trader 2. The first trader sells 250 shares of XYZ and purchases 500 shares of ABC stock. The first trader purchases the 250 shares of stock XYZ from the other trader, who sells the 500 shares. There are 750 shares traded in the market total—500 shares of ABC and 250 shares of XYZ. This is due to the fact that we only count 500 shares when trader 1 purchases 500 ABC shares from trader 2—we do not double-count the volume. Similarly, the volume total for XYZ would only show 250 shares.
Disclaimer
Derivative investments involve significant risks that may result in the loss of your invested capital. You are advised to carefully read and study the legality of the company, products, and trading rules before deciding to invest your money. Be responsible and accountable in your trading.
RISK WARNING IN TRADING
Transactions via margin involve leverage mechanisms, have high risks, and may not be suitable for all investors. THERE IS NO GUARANTEE OF PROFIT on your investment, so be cautious of those who promise profits in trading. It's recommended not to use funds if you're not ready to incur losses. Before deciding to trade, make sure you understand the risks involved and also consider your experience.