Volume

In short

A friend of mine used to say a price without volume is just a rumor. You have probably noticed a stock jump on the screen and wondered if anyone believed it. Volume is the count of shares that changed hands in a set stretch of time, most often one day. Look at it beside the price, never by itself. A big move on heavy volume tells you many people took part. The same move on thin volume tells you only a few did, and thin markets cost more to trade in. Before you place any order, look at the volume and the gap between the bid and the ask, because those two numbers tell you what your trade may really cost.

The whole of it

What it is

I once watched an old farmer at a county auction. When two or three neighbors bid on a cow, the price held steady. When only one man showed up, that cow went for whatever he felt like paying. Volume is how many neighbors came to the auction.

If you are holding a stock, or thinking about one, volume answers a simple question. How many shares traded? If 10,000 shares changed hands today, the volume is 10,000. Each share counts once, even though it has a buyer and a seller. That surprises people. One trade of 100 shares adds 100 to the volume, not 200.

You will see volume on nearly every quote page, usually as a bar under the price chart. Some pages show dollar volume too. That is the number of shares times the price paid. Both are fair ways to measure activity. The share count is the plain one, so we will lean on it here.

How it works

You have probably placed an order and watched it fill in a blink. Or you may have waited and wondered why nothing happened. Volume is a big part of that story.

Every trade needs a buyer and a seller who agree on a price. Exchanges keep a list of what buyers will pay, called the bid, and what sellers want, called the ask. The gap between them is the spread. When many people trade a stock, the bids and asks pile up close together, and the spread is small. When few people trade it, the spread can be wide. A wide spread is a cost you pay the moment you buy. You pay the ask and could only sell at the bid.

Volume also shows how strongly the crowd agrees with a move. Say a stock rises 4 percent on a day when volume is far above its usual level. Many people took part in that rise. Say it rises 4 percent on a day with very little trading. A handful of orders may have pushed it. That does not make the move false. It just makes it less certain.

Traders compare each day to a baseline, often average daily volume over the past 30 or 50 days. The comparison is simple. Divide today's volume by the average, and you get a ratio. A ratio near 1 means a normal day. A ratio of 2 means twice the usual crowd came. Nobody hands you the average. Most quote pages show it beside the volume, and you can work it out yourself if not.

Volume runs in patterns through the day. Trading tends to be busy near the open and near the close, and quieter in the middle. Big news, earnings reports, and index changes can all pull volume up. Holidays and summer afternoons can pull it down.

The numbers, and where to find yours

You do not need a fancy tool to find volume. Your brokerage quote page shows it. So do the free quote pages run by most financial sites. The exchanges themselves publish trading data for the stocks listed on them, and the Nasdaq and the New York Stock Exchange each keep quote pages on their own sites.

There are three figures worth writing down for any stock you are studying. The first is today's volume. The second is average daily volume, which your quote page will label and define. The third is the bid and ask spread, which you get by subtracting the bid from the ask.

Fees matter here too, so look at your own account. Many brokers now charge no commission on stock trades. That does not make trading free. The spread is still a cost, and it grows when volume is thin. There are also small regulatory fees on sales. The Securities and Exchange Commission sets a Section 31 fee rate, and it changes from time to time. For the current rate, read the SEC's own fee rate page, which posts the figure with its effective date. On this site the placeholder reads the current figure, which the official source publishes each year. Your broker's fee schedule will show how it passes that fee along.

A worked example

Let me tell you about a woman named Dolores. She is a retired bookkeeper in Ohio, careful with a dollar. She wanted to buy 200 shares of a small company and saw it quoted at 12.00 dollars.

Being careful, she looked a little closer. The bid was 11.90 dollars and the ask was 12.10 dollars. The spread was 12.10 minus 11.90, which is 0.20 dollars per share. Volume that day was 8,000 shares, and the 30 day average was 10,000 shares. Her ratio was 8,000 divided by 10,000, which is 0.8. A slightly quiet day.

Next she checked the cost of that spread. She would buy at the ask of 12.10 dollars. Her cost was 200 shares times 12.10 dollars, which is 2,420 dollars. If she turned around and sold right away at the bid of 11.90 dollars, she would get 200 times 11.90, which is 2,380 dollars. The difference is 2,420 minus 2,380, or 40 dollars. That 40 dollars is the price of the spread on a round trip, with no commission at all.

Then she looked at a large company with heavy volume. It was quoted at 12.00 dollars, too. The bid was 11.99 and the ask was 12.01. The spread was 0.02 dollars. On the same 200 shares, the round trip cost was 200 times 0.02, which is 4 dollars.

Same price. Same share count. Forty dollars against four dollars. Dolores did not decide anything about which stock to own from this. She just learned what each door costs to walk through. That is all volume asked of her that morning.

Where it goes wrong

I have made this mistake myself, and I would not think less of you for making it. We see a big volume number and treat it like a signal. It is only a count. High volume shows that many people traded, but it does not show why, and it does not show who was right.

Volume can be high on bad news. It can be high on good news. It can be high on a day when a fund is simply moving money around. Read alone, it tells you very little about what comes next.

Another slip is comparing volume across different stocks. A share count of one million means one thing for a company with a billion shares out and another for a company with ten million. Compare a stock to its own past, not to a stranger.

Then there is the thin market trap. A low volume stock can look cheap on the screen and cost you plenty at the counter. Wide spreads eat you both going in and coming out. Market orders, which take whatever price is on offer, can fill far from the last price when few people are trading. A limit order, which sets the most you will pay, gives you control. It may not fill, but it will not surprise you.

Last, remember that reported volume can differ from one source to the next. Some pages count only one exchange, and others count every venue. If two pages disagree, check what each one includes.

Questions to answer before you leave this page

Can you find today's volume and the average daily volume for a stock you care about, and do you know how the two compare? Do you know the bid and the ask, and can you subtract one from the other to see the spread? Have you worked out what that spread would cost you in dollars on the number of shares you have in mind? Would a limit order suit you better than a market order if trading is thin? Does your broker charge fees on top of the spread, and where is the fee schedule posted? And if the price moved a great deal today, do you know whether many people traded or only a few?