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Role Of Volume In Stock Market

Volume of a stock is the number of shares that are traded in the stock exchange within a given period of time. Volume plays an important role in the buying and selling of the stocks. In fact it is the second most important parameter to judge the potential of a stock after the price level. Most investors combine the volume with the price of the stock to take the buying and selling decision. Let us see why volume of the stock is so important in judging the potential of a stock.

Volume reveals the numbers of shares traded in the market. Investors compare the volume of a stock on particular day with the average trading volume for that particular stock. For example if the price of a particular stock has risen to a significant level and broken an upper limit, it is generally thought that the stock will rise further. But if the volume of the stock is way too lower than the average trading volume that means the stock can not go further up. This is simply because as the volume indicates, there is not much buyer for that stock in the market. Especially the bigger buyers like mutual funds, foreign investors and financial organizations are not trading in that stock.

There may be so many reasons behind this. The buyers can be susceptible about the stock and resign from buying that particular stock even if the price is increasing. This typical situation when the price is rising above average and the volume is lower than the average, might create panic among the investors and they can sell the stock in fear of downfall, that will result in further fall in the price of the stock. This is also true when the price of a stock is falling the volume is lower than the average.

Therefore, it is always wise to compare the trading volume alongwith the price level to decide whether to buy a stock or not.




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