What is Trading Volume?
Trading Volume is an Indicator for Market Activity
Besides price, another critical metric when investing in stocks is trading volume. “Price reflects market trends, while trading volume indicates market activity.” While price changes help us see the direction of the trend, trading volume simultaneously shows how many shares are being traded in the market during a specific time period.
Generally, if there is no significant news released during the trading day, the two highest periods with the highest trading volume are the first 30 minutes after the market opens and the last 30 minutes before it closes.
Trading Volume Should Be Based on Time Range
Trading volume can be considered the total amount of shares traded over a specific time period. Naturally, the length of that period will affect the volume. For example, if you’re viewing a daily chart, the volume displayed represents the total number of shares traded each day.
Using Yahoo Finance as an example, you can see how changing the time range at the bottom adjusts the total trading volume shown.
Trading Volume Units May Vary by Asset Type
| Asset Type | Volume Unit |
|---|---|
| Taiwan Stocks (Individual) | Lot (1000 Shares) |
| Overseas Stocks (Individual) | Share |
| Major Indices (e.g., Taiwan Weighted Index) | Transaction Amount (Dollar) |
The units used to measure trading volume vary depending on the type of asset. In discussions of Taiwan stocks, volume is typically expressed in lots (1000 shares), while overseas stocks are measured in shares. For major indices like the Taiwan Weighted Index, trading volume is measured in terms of transaction amount (NT$).
Trading Volume is a Measure of Liquidity
Average Trading Volume Indicates Current Market Interest
Before trading a stock, it’s a good idea to check its daily average trading volume. By summing up the trading volume over a specific period and calculating the average, you get the average trading volume. If the daily trading volume exceeds the average trading volume, it suggests heightened interest and activity in the stock compared to usual levels.
Using Trading Volume to Avoid Liquidity Traps
Think of liquidity as a stock’s popularity. When a stock is popular (high trading volume), it’s easier to find buyers willing to purchase shares or sellers willing to part with them. On the other hand, if a stock has low trading volume (low popularity), it is harder to find investors willing to trade and may require investors to pay higher transaction costs (such as buying at a premium or selling at a discount).
Price and trading volume are crucial aspects investors often focus on. If you’re interested in learning more, check out our article What is volume-price analysis? where we would discuss common interpretations of the relationship between price and volume in the market.
