Trading volume

This is the number of shares that changed hands within a specified time frame. Stocks that have less shares outstanding normally registers a lighter volume. Volume can be a measure of liquidity in a particular stock and is an indicator about the importance of the price movement. Stocks trading on light volume are vulnerable to a whipsaw in price while stocks trading at a high volume are less volatile and more liquid. Volatility is increased when a huge order for a stock is placed but there are a few or no buyers or sellers. On a light volume condition, people buying or selling a significant number of shares can directly influence a rise or a drop in the stock price. Lets say a stock's average trading volume is 70,000 shares with a price ranging from $10 to $10.50 and has 20 million shares outstanding. When a huge surge of sell orders breached that normal volume, say 4,000,000 sell orders, it would cause the price to drop if there are not enough buyers for it. Since 4 million shares is 20% of its shares outstanding of 20 million, a huge spike in volume is notable and will cause wild price swings. If 70,000 out of that 4 million sell orders can be filled, then it would take another 3,930,000 buy orders to offset that sell volume, this would cause the stock price to fall in value and will fall further when other investors who hold shares of the company suddenly panics and started selling their shares to protect their gains if they haven't lost it yet, increasing its down volume and flooding the market with hard to sell shares of that company.

On the other hand, if the opposite thing happens where there is a huge buy order for a stock beyond its normal trading volume, there would also be a spike in price but this time its on the upside. That is why some stocks with low market cap and share price trading pennies on light volume can be manipulated, since all it takes is a huge buy order significant enough to propel that penny to a dollar and sending a psychological message to other investors to buy this hot sexy stock on the way up. When other investors starts buying, it increases the trading volume sending it higher before initial investors starts dumping their stock slowly that would send the price back down to the floor. So it is important to look at the average volume of the stock to assure liquidity, most high volume stocks are less volatile. A spike or a change in average trading volume can alert us whether insiders (people who are a part of the company who owns a significant number of shares) or institutions like hedge funds or mutual funds are buying or selling. When this happens go with the flow since they hold huge amounts of shares, this means they could influence the price. A company buying back their shares in the market places a constant buyer for that stock and depending on the size of the buyback, it should raise the price to a new level. A spike in normal trading volume influence the price significantly.

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