Volume

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Volume in financial markets refers to the amount of a given security or other financial product that is bought and sold, usually measured on an exchange, in a given time frame. Volume can be measured either in numbers (trading volume) or value (dollar volume or notional value).

Volume is very important to trading markets because it illustrates the extent of market liquidity, which in turn makes those markets more competitive by lowering volatility and slippage and by narrowing spreads.[1] It is usually measured as trading volume but dollar volume - average security price multiplied by total number traded - is preferred for some stocks.

Driving Volume

Security exchanges try to push up volume to increase liquidity, and to do this larger exchanges have begun acquiring smaller ones. The New York Stock Exchange (NYSE), for example, chalked up record volumes in 2007-2008 helped by its acquisition in 2007 of the European derivatives group Euronext.[2]

The Earnings Announcement Premium and Trading Volume

Volumes are also affected by factors like time of the year and even individual trader psychology. Trading volume on a stock, for example, usually surges in the period leading up to the company's earnings announcement, which pushes up the "announcement premium" of the stock.[3] Individual traders considered "overconfident" in their abilities also trade more often than more realistic traders.[4]

Technical Analysis

Volume readings are used by some traders as a technical analysis tool to help determine the health of the market or particular trend.[5]

References

  1. Volume. TheStockBandit.com.
  2. Merger, Higher Trading Volume Help Boost NYSE Euronext's Net. Wall Street Journal.
  3. The Earnings Announcement Premium and Trading Volume. National Bureau of Economic Research.
  4. Overconfidence and Trading Volume. SSRN.
  5. Volume. Profit Financial Systems.