![]() For example, in a market environment where prices are falling and volume is increasing, you may decide to buy in to try and profit when the market recovers and prices start rising again. That, in turn, can help with determining when to buy or sell. When prices move up or down sharply on increasing or decreasing volume, that can signal that a shift is happening or is about to happen in the market. Specifically, you’d want to look at how prices are moving in connection with trading volume. If the volume is on the increase overall, you can go deeper to analyze what’s driving higher trading activity. There are a few ways that trading volume can help with evaluating stocks and broader market trends as a whole.įor example, tracking volume can help you get a sense of where the market is going collectively. You might have seen some big gains in price with a stock that’s trading at a lower volume but unless you have someone who’s ready to buy all of your shares in one go, it may take you longer to sell them and reap the rewards. Reduced liquidity: Since there are fewer shares traded, investors may find it more challenging to find a buyer when they need to sell to liquidate assets. In other words, you’re more likely to see substantial price swings with a stock that’s traded less frequently versus one that’s regularly trading hundreds of thousands of shares per day. Potential for increased volatility: Lower trading volume can make stock share prices more sensitive to volatility. Growth investors could similarly find an opportunity to purchase an inexpensive stock that’s on its way up. Those stocks may increase in value over the long-term. Value investors, for example, may capitalize on undervalued stocks. More opportunity: Stocks that trade at low volumes may offer more opportunities for investors. Pros and cons of trading low volume stocks However, you may take on more risk with an unproven company. Penny stocks could offer an opportunity if they take off. For example, you may invest in penny stocks trading at high numbers. As a result, they reduce your risk of not being able to liquidate assets.Ĭan require more speculation: High volume stocks might be fairly obscure. There tend to be more investors trading high volume stocks. Reduced liquidity risk: Liquidity measures how easily you can convert your investments to cash. Smaller spreads can translate to more buying and selling opportunities for investors. A buyer prepares to pay a bid price, while the seller sets an ask price. Narrow spreads: High volume stocks tend to have a much closer gap between the bid price and ask price. That can lower your risk factor since larger numbers of investors pour money into the stocks. This means you’re less likely to see huge swings in pricing over the course of a trading day. Minimize volatility: By nature, a stock that’s trading at a higher volume may be less volatile. Pros and cons of trading high volume stocks ![]() Low volume stocks would be below that mark. Howerver, high volume stocks typically trade at a volume of 500,000 or more shares per day. There’s no specific dividing line between the two. Meanwhile, low volume stocks are more thinly traded. Stocks can be categorized as high volume or low volume, based on their trading activity. On the other hand, if volume increases along with prices then that may signal a strong market. Volume has a correlation to a stock’s price: Trading activity can fluctuate as share prices increase or decrease.įor example, trading volume may pick up if political or economic fears trigger a sell-off. ![]() If another investor buys them, the total trading volume is 500 shares, not 1,000. There are two sides to trading volume transactions: the buy side and the sell side. ![]()
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