what does volume mean in the stock market?

Question

i'm playing a stock market game at skool.. my professor wants us to buy two stocks with $5000. how do i know which stock to buy? what do I base my choices on? volume? price? what?
thanks...

Answer 1

What time frame are you using?

Long-term investing requires finding a solid business with good prospects for growth. Comparing the "value" of the stock with its current price determines how likely it is to be a good investment. Value is a function of earnings and future earnings growth, as well as market share, solid balance sheet, and other factors.

Short-term investing isn't too different from gambling, but you can improve your odds by looking at momentum and "technical" factors such as stochastics.

Stocks with low volumes can be easily manipulated, and have price swings that reflect short-term supply and demand imbalances. High volume stocks tend to be more efficient, but are not guaranteed to be fairly priced.

Ignore the recommendations of the "experts," unless you want to use them as contrarian indicators. If they were so smart, they would make their fortune trading stocks, not talking or writing about them.

Answer 2

Interesting how we use the word "interest". It could be something the bank pays us to use our money for a while. It could be what we pay the bank when they lend us other people's money for a while (notice how the interest we pay and the interest we are paid are different, the bank getting the difference). Another use for the word "interest" is more akin to attention.

When a stock is selling around a certain price, and volume is low, then the price may be somewhat unchanged, if not lower, for a while. If the volume rises, rising substantially, then one of two things is generally going on--either a bunch of people are suddenly buying it, or a bunch of people are suddenly selling it. Technically, when a trade is made, someone sells and someone buys, else there was no transaction. But what were the reasons for initiating it? Say the company has bad news, a refinery caught fire, earnings were dismal, the primary product has a major class-action suit brought against it, everything was recalled for defects, etc. Then people who are not into the stock for the long run, and even some of those who are, may want to sell their stock. When that happens, others who agree to buy it will make a bargain for a cheaper price. After all, the company is now worth less. The investors headed for the exits may simply dump the stock at any price. This change in transaction volume, along with falling prices, is a clue for you that at least for a little while, the price of this stock is on a downhill slide.

If the matter is temporary, if the rumor is wrong, if the extent of damage is much smaller than reported and assumed, then some folks will be seeing that the cheaper prices are a buying opportunity. That means things may very well start to change. So if volume is high and the price decline slows or stops, then this could give you a clue that it will be coming back up.

Volume is not a slam dunk indicator, but it gives some important clues. While it is not technically a gamble (you don't put your money down and lose it if your number doesn't come up on the next play), there is risk. A slowing decline could simply mean a pause before another fall, as the old expression goes, "waiting for the other shoe to drop." That is why some people talk about diversification, not putting all your eggs in one basket, to use yet another metaphor. For the sake of your class project, you can't necessarily figuratively put your money, say, in the top 100 profit-makers of the Standard & Poors (S&P) 500 list, or maybe even divvy up shares across the 24 'industry' groups in the S&P, buying the most profitable of each. But see if you can at least buy into two good but dissimilar companies, and five to ten is better still. Since your class project is a short term thing, look for something seasonal. My first real money bought shares of a company that made window air conditioners, which I bought during winter. Since we are approaching autumn, now might not be the best time to have Coke or Pepsi on your short list, but makers of coffee, tea, or cocoa might. Retailers gearing up for Christmas, with good sales growth prospects might be the best play for now. Leave real estate alone, people buying it cheap are picking up long-term bargains, which will be out of the scope of your project. Scour the news for something new (remember, if you can see it in the general news, it may have long ago been noticed and acted upon by stock traders, so company news often, but not always, is more an explanation of what a stock has done, than a spur to what it is going to do), something fresh. You might look for earnings announcements. Especially if a company has had a string of poor earnings and stories of the company in places like Businessweek, Forbes, or Fortune (your library likely has these) show a company addressing the unprofitable issues--then bet, as in buy, that the company will have better earnings reports, so if it does, you get a piece of the upward bounce, maybe. Here is where diversification comes in. I bought into a company back in January and February. It slowly but steadily rose over five months. It had a good but not stellar earnings report. The very next morning, when the stocks first opened, it sold for two dollars lower. I bought at four, it rose to six-something, and even with a good report, the market wiped out the gains before I could move a finger. It happens, but I've also seen, and experience the other. That is why diversification, of some degree, is important. Good luck.

Answer 3

Volume:Number of shares traded within the operating hours of the market.

I had this project in school too, so I decided to pick three stocks I liked first. I picked a technology stock that I liked (risky), an industry stock that was stable but growing (moderate risk) and an old standby stock (conservative risk) and I looked at how many shares I could buy of each and how that would trend out over the next three years if everything grew at the same rate. (It didn't take very long and I had a good answer.)

Answer 4

traded volume shows the interest of traders in a particular share. it is also an indication of how much liquid a share is. generally high volume associated with increasing or falling prices confirm rising or falling trend. lower volume indicates that the particular trend may not continue.