Volume (finance)

In capital markets, volume, or trading volume, is the amount of a security (or a given set of securities, or an entire market) that were traded during a given period of time. In the context of a single stock trading on a stock exchange, the volume is commonly reported as the number of shares that changed hands during a given day.

The average volume of a security over a longer period of time is the total amount traded in that period, divided by the length of the period. Therefore, the unit of measurement for average volume is shares per unit of time, typically per day.

Significance

Trading volume is usually higher when the price of a security is changing. News about a company's financial status, products, or plans, whether positive or negative, will usually result in a temporary increase in the trade volume of its stock.

Higher volume for a stock is an indicator of higher liquidity in the market.^[1] For institutional investors who wish to sell a large number of shares of a certain stock, lower liquidity will force them to sell the stock slowly over a longer period of time, to avoid losses due to slippage.

Legal implications

In the United States, the Rule 144 of the Securities Act of 1933 restricts the buying or selling of an amount of a security that exceed a certain fraction of its average trading volume. Therefore, the calculation of the trading volume is regulated by the SEC.^[2]

References