Stock market investing requires skill and knowledge. Before taking a trade or making an investment for the long term, you must thoroughly understand its business and the stock’s potential to move upwards. You can make good profits in the by conducting a proper analysis of a company. In fact, the sky is the limit when it comes to earning returns. There are many powerful indicators that one must look at before taking a position in the stock. One such indicator is volume. Volume is basically the number of shares that are trading during a market session. Volume helps in knowing the trend of a stock and its perception among the people in the market. This article will learn the basic concept related to volume and its significance in the stock market.
Let us begin by learning the meaning of the term volume.
What is Volume?
When you purchase or sell shares in the stock market in a single trading session, it is termed a stock volume. By learning the number of traded shares in a particular session, you can analyze the stock price pattern and trend. The data for the volume of stocks or options contracts or the entire stock market can be found on any stock market mobile application or website. Volume acts as an indicator of where the price of the stock will go in the future. However, very few traders and investors use the volume data to their advantage. The volume of a stock is determined through the supply and demand concept. For every seller, there is a buyer and vice-versa. Like for example, X wants to sell 100 shares of Reliance Industries at Rs. 1,400, and Y are willing to buy 100 shares of Reliance Industries at Rs. 1,400, then X and Y have contributed a total volume of 100 shares. Often, there is a wrong perception among the traders that the above trade would add 200 in the total volume.
Importance of Volume
Whenever a company is about to release its financial results or an expectation of news inflow, there is always an increase in the stock price volume. When the news flow or numbers is good, the increased volume takes the stock price upwards. Likewise, when the outcome of the news flow or numbers is negative, the increased volume takes the stock price to lower levels. Therefore, the volume gives the sign of the stock price movement and its future trends. Let us try to understand what increased volume could mean.
- When the stock volume increases with an increase in the price, it means that the stock is in bullish mode, and it would go further up in coming sessions.
- When the stock price increases, it will have lesser volumes, which means that more retailers are buying the stock instead of institutional investors. You must avoid such stocks as they can be a bull trap.
- When the volumes increase with decreasing stock price, it means that the stock is in bearish mode and falls further.
- When both price and volume decrease, the stock is falling due to sell-off from the retail participants and not due to institutional investors’ selling. A decline in the volume signifies that the big investors are not offloading their stake in the company. You must avoid such stocks as it can be a bear trap.
The above mentioned are a few points about the importance of volume. Let us now learn about the different types of volumes.
Different Types of Volumes
When the share trade is not squared off on the same day and share transfer from one demat account to another occurs, it is called delivery volume.
Both of these volume data are very important for trading and investing. When the volumes are looked at in charts, you get more clarity about the future share price movement.
Volume is undoubtedly one of the important pieces of data in the share market. When the data is combined with the support and resistance of a stock price, it gives an even clearer picture of the future price movement. Volumes are also an important part of share market live charts. The chart patterns on the graph are made according to the volume and price action in the stock. If you want to learn more about volumes in stocks or want to trade/invest in the stock market based on volumes, you can contact Kotak Securities.