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Role of Volume In Stock Market
Volume of a
stock is the number of shares that are traded in the stock
exchange within a given period of
time. Volume plays an important role in the buying and selling of the stocks. In
fact it is the second most important parameter to judge the potential of a stock
after the price level. Most investors combine the volume with the price of the
stock to take the buying and selling decision. Let us see why volume of the
stock is so important in judging the potential of a stock.
Volume reveals
the numbers of shares traded in the market. Investors compare the volume of a
stock on particular day with the average trading volume for that particular
stock. For example if the price of a particular stock has risen to a significant
level and broken an upper limit, it is generally thought that the stock will
rise further. But if the volume of the stock is way too lower than the average
trading volume that means the stock can not go further up. This is simply
because as the volume indicates, there is not much buyer for that stock in the
market. Especially the bigger buyers like mutual funds, foreign investors and
financial organizations are not trading in that stock.
There may be so
many reasons behind this. The buyers can be susceptible about the stock and
resign from buying that particular stock even if the price is increasing. This
typical situation when the price is rising above average and the volume is lower
than the average, might create panic among the investors and they can sell the
stock in fear of downfall, that will result in further fall in the price of the
stock. This is also true when the price of a stock is falling the volume is
lower than the average.
Therefore, it is always wise to compare the
trading volume along with the price level to decide whether to buy a stock or
not.
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