Volume of Trade: What Is It?

The trade volume is the total number of shares or contracts exchanged for a given security. Any security traded throughout a trading day can be used to measure it. Trade volume is the total amount of trading in stocks, bonds, futures, options, and commodities.

Recognizing Amount Traded

The trade volume measures the number of shares or contracts traded for a particular security period. It comprises the total number of shares exchanged between a buyer and a seller. Trade volume is higher for securities traded more actively and lower for securities traded less actively.

Volume usually peaks around the market’s opening and closing and the beginning and end of the week.

How Trade Volume Is Calculated

Every market exchange provides volume data and keeps track of its trading activity. Throughout the present trading day, the volumes of trade statistics are reported as frequently as once every hour. The trade quantities reported hourly are approximations. Another estimate is the trade volume disclosed at the end of the day. The final real numbers are released the next day.

Since prices tend to move more frequently with a higher trade volume, investors may also use a security’s tick volume, or the number of price changes in a contract, as a stand-in for transaction volume.

Investors can learn about the activity and liquidity of the market via volume. Increased trade volumes indicate improved order execution, increased liquidity, and a more lively market for bringing buyers and sellers together. Futures trading activity typically rises when investors are apprehensive about the stock market’s direction, frequently leading to more active trading in options and futures on particular equities. Overall volume is typically higher on Mondays and Fridays and near the market’s opening and closing hours. Before a holiday and during lunchtime, it usually decreases.

Particular Points to Remember

Index funds and high-frequency traders have recently contributed significantly to trading volume data in US marketplaces. In contrast, “fundamental discretionary traders”—traders who assess the fundamental factors affecting a stock before investing—accounted for only 10% of total trading volumes. The study conducted in 2017 by JPMorgan revealed that passive investors, such as quantitative investment accounts and ETFs, which use high-frequency algorithmic trading, accounted for 60% of overall trading volumes.

Dealers and Trade Volume

In technical analysis, traders employ a variety of trading factors. Trade volume is one of the most basic technical elements traders examine when evaluating market deals. The transaction volume during a significant price increase or decline is crucial for traders since big volumes during price movements can point to particular trading catalysts. Substantial volumes linked to positive price movements may also bolster evidence favoring a security’s value.

Traders can also use volume levels to determine the best moments to execute a deal. When choosing when to enter a trade, traders look at an asset’s average daily trading volume over short- and long-term timeframes. Several volume-based technical analysis indicators are also available to traders. The Securities and Exchange Commission (SEC) governs the selling of securities by traders. Rule 144 states that sellers are not allowed to sell securities for more than 1% of the outstanding shares of the same class.

An Illustration of Trade Volume

Suppose there are two traders in a market: Trader One 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 XYZ from the other trader, who sells the 500 shares. Are 750 shares traded in the market—500 shares of ABC and 250 shares of XYZ? This is because we only count 500 shares when trader one 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.

Conclusion

• The trade volume is the total number of shares or contracts traded between buyers and sellers of securities during trading hours on a given day.
• One indicator of the activity and liquidity of the market over a specific period is the volume of transactions.
• Because they indicate greater liquidity and better order execution, higher trading volumes are seen more favorably than lower ones.