What is Trading Volume?

Trading volume reflects the market’s overall activity, indicating the sheer amount of buying and selling of securities. 

Next to price, trading volume is one of the most closely watched indicators. Specifically, it represents the total number of stock shares, bonds, or commodities futures contracts traded during a specific period.

The major exchanges report trading volume figures daily, both for individual issues trading and for the total amount of trading executed on the exchange. This metric indicates both market liquidity and the supply and demand for securities. It also reflects pricing momentum. When stock market activity—i.e., volume—is low, investors anticipate slower moving (or declining) prices. When market activity goes up, pricing typically moves in the same direction.

Low volume of a security, even if it’s rising in price, can indicate a lack of conviction among investors. Conversely, high volume of a particular security can indicate that traders are placing their long-term confidence in the investment. Certain types of investors who subscribe to the “technical analysis” school of thought place enormous importance on the amount of volume that occurs in the trading of a security or commodity futures contract.

Lastly, trading volume also serves as a warning as to whether a stock is on the verge of breaking into upside territory (high volume) or into a downside trend (low volume). High volume gives investors more time to determine when it’s the right time to sell for a profit. For example, a dramatic rise in volume is interpreted to signify future sharp rises or drops in price, because it reflects increased investor interest and sustained momentum. Low volume, on the other hand, can generate price volatility and mirror factors that are ephemeral and untrustworthy from an investment standpoint.

Take note: Extremely low volume sometimes attracts scam artists who are determined to manipulate the stock price because their trading will exert an outsized influence.

To learn more, download our FREE report, Technical Analysis of Stocks: How Relative Performance Works, Why Trading Volume is Important, and Other Chart-Reading Lessons.