Volume definition

What is volume?

Volume is a measure of quantity. In finance, volume is the amount of a particular asset traded over a period of time. Volume is a key indicator of market activity and liquidity, which means that it is often presented alongside price information.

Whenever a contracted is traded, there has to be a buyer and a seller in order for the transaction to take place - each transaction is a single exchange and will contribute to the trading volume. It is worth noting that the number of actual transactions is not given in the trading volume, it is the number of assets traded that is counted. So, if five buyers purchase one share each it looks the same as if one buyer purchases five shares.

When a market is described as 'active' it indicates that the trading volume will be higher, and if the market is described as 'inactive' it means that the trading volume will be lower. The trading volume is usually higher when there is a significant price fluctuation in the market - this could be in response to news reports, company announcements, political announcements and so on.

Pros and cons of volume

Pros of volume

Volume can be used to measure stocks, bonds, options, futures, commodities and forex. However, volume is used most often in share trading, where it shows the number of shares that are being traded.

As volume offers an extra dimension when examining an asset's price history, it is a popular tool in the technical analysis of markets. It helps determine the strength of price movements. If a price movement is accompanied by a proportionate increase in volume, it is seen as more significant than one that isn't.

Cons of volume

Each market or exchange will track its own volume and distribute the data to traders. These volume reports usually come once an hour, but they are only estimates - for accurate volume figures traders have to wait until the end of the day.

However, there are other ways that traders can determine market volume, such as the tick volume or number of price changes. If the market price is changing rapidly, it can be an indicator of high trading volume.

Example of volume

Let's say that you are looking at the volume of trading on the stock market. You decided to focus your attention on company ABC and want to determine whether the share price is increasing. However, you can see that there is a low trading volume, which would mean that there is little buying power on the market.

You decide that the price movement isn't bullish enough and decide not to open a position.