What Is Stock Volume and How Is It Measured

Stock volume is one of the fundamental concepts in the stock market that you should understand to make more informed decisions when investing. While share prices are often discussed, volume reveals the strength behind price movements. 

It provides insight into the liquidity and overall market activity of a stock. Using this information, you can understand the stock market activity and confirm if a price pattern is worth acting on. Thus, you can buy or sell stocks at the right time by analysing market sentiment. 

Stock volume refers to the total number of shares of a particular stock that change hands through matched buy and sell orders. It is calculated for a specific period, typically one trading day.

For instance, if 500,000 shares of a company are traded on a day, the stock’s daily volume is 500,000. It is an important metric because it gives context to price changes. 

A price movement accompanied by high volume usually suggests strong market interest and conviction. However, the same price change for a low volume may indicate weaker support.

Stock volume is recorded by stock exchanges like the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) through their electronic trading systems. Every executed trade, whether a buy or sell order, is counted. The number of shares in each transaction is added up to calculate the total volume.

This data is then published on websites of exchanges and disseminated through brokerage platforms and financial news portals. Volume is visually represented as vertical bars beneath stock price charts, with the height of the bar indicating the number of shares traded.

The volume serves as a critical tool for understanding market behaviour and validating price trends. Here are some reasons to analyse the trends with this metric. 

• Confirms Price Movements

Price increases with rising volume suggest strong buyer interest, potentially indicating a sustainable uptrend. Conversely, price declines with high volume confirm selling pressure. 

• Indicates Liquidity

Higher volume means a stock can be bought or sold more easily without causing large price changes, reducing the risk of slippage. 

• Signals Potential Reversals

Sharp spikes in volume can signal the beginning of a new trend or the end of an old one. 

• Assesses Market Sentiment

Volume helps gauge feelings of either enthusiasm or fear in the market, which often drives price volatility. 

There are multiple reliable sources for checking stock volume. The following are the most reputable sources you can trust.

• Stock Exchange Websites: NSE and BSE provide official volume data for all listed stocks

• Brokerage Platforms: Most online brokers and trading apps display volume data alongside stock price charts

• Financial Websites and News Portals: Certain reputed publishers of financial information offer real-time volume figures and historical data

• Technical Analysis Tools: Charting software displays volume as bars or overlays on price charts, often with indicators to aid interpretation

You can use these platforms to monitor volume trends and integrate this data into your investment or trading strategies.

Volume fluctuates throughout the trading day and in response to market events, due to the following reasons:

• Market Open and Close: These periods usually experience the highest volume as traders execute overnight orders and rebalance portfolios

• Earnings Announcements: Stocks often see volume spikes around earnings due to new information impacting investment expectations

• News and Corporate Events: Announcements such as mergers, acquisitions, or regulatory approvals can cause significant volume changes

• Volume Spikes: Sudden increases in volume may indicate institutional buying or selling or speculative interest, often preceding major price moves

• Low Volume: This may occur during holidays, market uncertainty, or for less popular stocks, which can lead to price volatility

Many investors incorporate volume analysis to refine their entry and exit points. Here are some of the metrics you can use to make informed investment decisions:

• On-Balance Volume (OBV): Measures cumulative buying and selling pressure to confirm price trends

• Volume Weighted Average Price (VWAP): Provides the average price weighted by volume, used for benchmarking trade execution

• Volume Breakouts: Traders watch for volume surges to confirm price breakouts from support or resistance levels
  

When you combine the analysis of stock volume with share price, you can make better decisions regarding entry and exit.

Volume and price are closely interconnected in the stock market, but their relationship may vary depending on market context and sentiment.

• Trend Confirmation: Rising prices accompanied by increasing volumes typically indicate a strong uptrend, confirming that the price movement is supported by widespread buying interest

• Market Strength: High volume during price increases or decreases signals strong conviction among market participants, making the trend more reliable

• Potential Reversals: Divergences between price and volume can signal trend reversals

• Consolidation Phases: High trading volume can occur without significant price movement, indicating a consolidation phase or indecision in the market

Volume Spikes Without Price Change: A sudden spike in volume with little price movement may indicate that buying or selling pressure is building up but hasn't yet impacted the price significantly

Stock volume is an indispensable tool that offers a window into the health and sentiment of the market. It complements price data by showing the level of trading activity and liquidity, helping you gauge market strength and anticipate potential price moves. 

By understanding and monitoring volume, you can make more informed and confident decisions.

This content is for educational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.