What is Trading Volume?

Trading volume, sometimes simply referred to as volume, refers to the number of shares or contracts of a security traded during a defined time period. Most commonly, trading volume is measured daily, but depending on the security that is being traded, volume may be measured on longer timelines such as a week or a month. For example, if Investor Bob has purchased 5,000 shares of stock from XYZ Corporation, he has increased XYZ's volume by 5,000 for the day. If Investor Bob would have sold 5,000 shares of XYZ Corporation, he would have also increased their volume by 5,000 for the day.

When investors or financial analysts see a large increase in volume, it may indicate a significant change in the price of security. If trading volume increases significantly four times in a given year, that usually indicates when quarterly earnings statements were released for a company. Significant losses and earnings will generally lead to movement in the trading volume for that stock. When there are announced earnings, spikes in trading usually indicate warm and fuzzy feelings about a security from investors, and losses usually send investors to their brokers to dump their poorly performing security before they realize any considerable loss.

In addition to earnings reports, significant volume spikes may indicate some kind of important news taking place. For example, predictions of an increased corn crop, followed by record-breaking spring rains and floods decreased the normal corn supply, which will increase demand, and in turn, increase price. As a result of the floods, speculators and investors raced to their commodities brokers to purchase corn futures at a higher price, causing a significant increase in the trading volume of corn futures.

Institutional investors from large brokerage firms buy and sell securities in large blocks when investing for their clients. When analyzing trading volume, you may see a spike in volume that isn't explained by earnings reports or the news cycle. These spikes are most likely the cause of large trades made by institutions.

Although volume is a very simple measurement, the average person or novice investor may not understand how useful this information can be. Trading volume is a powerful market tool that is used for technical analysis. Movements in volume may indicate investor sentiment, important events taking place in the market, or institutional trading of the security.