Metric of the Week: Volume
So, we took a week off but we’re back with another metric this week. Another basic for you: volume. In this post, my friend John breaks it down and shows us why it is important, and how to generally use it.
Volume, put simply, is the amount of shares that was traded during a single trading day (9:30am-4pm). Average volume is used to analyze the amount of shares traded on average over a certain period of time, as certain days will obviously vary in trading activity. The volume metric can be found on any stock information page, and is also usually included along the bottom of a stock price chart. Here’s an example:
Volume is important to the investor because it can be used to gauge market sentiment on a stock during a certain day or period. A higher than average volume likely means that there was some news, usually an earnings announcement, which caused investors to heavily trade the stock (other instances include merger announcements, new product launches, or changes in corporate leadership). The volume metric can also be used in comparative analysis. For example, if Visa has a much higher-than-average volume day than Discover or Mastercard, this usually indicates that there is some news that solely affects Visa, and not the industry. However, if the news affects an entire industry, the volume for the company you’re watching and its peers will most likely rise in lockstep.
How should the educated investor use the volume number? Once again, volume is just one part of an investor’s toolbox. If you see that the volume of trades is way higher for a stock that you are investigating or holding, do some investigation into whether there is any news to back it up. Oftentimes, there are plenty of other investors following the market full-time, so as a part time investor, it really doesn’t make sense to trade singly if you see higher volume. Others have probably beat you to it by that point. Apart from major news, volume can be used as a timing indicator, but the reasons for that are beyond the scope of this site, as they fall mostly into technical analysis. We, however, have a slight bent towards value investing, and believe that the most important facts about a stock are its fundamentals and whether it is undervalued or overvalued. Just a thought.