Volume in Stock Market Explained | Espresso

A Detailed Guide on Volumes in the Stock Market

It is not a smart idea to trade in the stock market without first learning the basics. However, given the volume of jargon, it will be tough for you to interpret all of the terms at once if you are a newbie. So, to keep things easy, start by learning what the term "volume in the stock market" means, and then get started investing or trading right away.

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What are Volumes in the Stock Market?

The term "volume" refers to the number of shares purchased or sold during a given time frame. It will assist you in comprehending the specific share's price pattern and the market's overall trend

Volume gives you an insight into the number of stocks and contracts traded. Then, as an investor, you can use volume to reduce the risk in your portfolio while simultaneously increasing your profits. To understand the concept of volume simply, let's take an example. 

Assume you buy 2000 shares of XYZ company at ₹500 each. At the same time, your friend sells the same quantity of XYZ company's shares at the same price. In this scenario, the two of you have created a stock market volume of 2000 shares. However, many investors misunderstand the concept by assuming a total volume of 4000 in this case.

How to Utilise Volume Data in Investing And Trading?

As a trader, you have probably noticed that every important news about a company's stock causes volume changes. For example, more investors rush to buy its stock when a company reports a strong profit or launches a new product. On the other side, if there is any negative news, the investor will begin selling their holdings. In both the preceding cases, you will observe a surge in the volume.

Below are the pointers to help you understand how volume is useful for investing or trading.

  • Higher volume indicates that the stock market participants are interested in either buying or selling that particular company's stock.
  • If both the volume and the price of any stock rise at the same time, it indicates that investors are confident in that company's financials and are aggressively buying its shares.
  • If the stock’s volume increases but the price continues to fall, the scenario indicates that investors are selling their shares.

Key Participants that Influence Volume in the Share Market

Volume fluctuations are influenced by five market participants. These are

  • Domestic retail investors:

Individuals who invest, trade, or transact in lower amounts on the market are known as retail investors. Your impact on the market as an individual trader is negligible.

  • NRI or OCI

Non-Residents Indians (NRIs) or OCIs also have minimal influence on the market volumes. Similar to domestic retailers, they also trade in a small quantity.

  • Domestic institutions

Domestic institutions or DIIs refer to large companies. For example, they could be insurance firms, banks, or other similar entities. DIIs typically buy stocks in large quantities and have a major impact on a company's stock volume in the share market.

  • Domestic asset management companies

Asset management companies, or AMCs, are firms that pool funds from a number of investors and then invest them in a variety of asset classes. They generally invest in a specific company's shares in quantity, resulting in a huge rise in volume.

  • Foreign Institutional Investors

Foreign institutional investors or FIIs are non-Indian companies that are interested in investing in enterprises with a promising future. FIIs, like the preceding two, transact in large quantities, resulting in a significant volume.

Different Types of Volumes on the Stock Market

There are two types of volumes. The first is traded volume, while the second represents delivery volume.

  • Traded volume: 

It refers to the number of shares exchanged at a given trading hour on the stock market. The high trading volume suggests that traders have actively participated during the specified period.

  • Delivery volume: 

It refers to those stocks under the traded volume that is actually delivered to the buyer out of the traded volume. Delivery volume represents share transfer from one Demat to another.

Example:

Assume you sell 2000 shares of XYZ company to your friend A. He further sells these 2000 shares to B. However, B kept the shares as a delivery rather than selling them further.

In this case, even though the actual trade volume is 4000 shares, the quantity deliverable (delivery volume) is only 2000 shares here. 

Key Takeaways

  • If both price and volume rise, the stock is likely to turn bullish in the next trading session.
  • When both price and volume fall at the same time, it suggests heavy involvement of retail investors. Therefore, you should avoid making any trades in this situation since it could indicate a bear trap.
  • When volume falls while the stock price rises, retail investors become involved again, signalling a bull trap. You must avoid trading in such a scenario.

Conclusion

The stock market's volume provides information on the company's potential. However, you must evaluate various market-related factors before investing. Analyse the market trend, understand the major global events, and decode the various government policies. Remember, the highest volume stocks do not always mean a good investment. 

Share Market Knowledge Centre

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Frequently Asked Questions

Higher volume does not always mean that the prices will move up. Several other factors play a role in the price movement. Some of them are government policies, global events, news related to a particular company, and more. You can only use them to get a general notion of how the stock will perform in the following trading session.

You can find the volume of shares on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). They publish the listed shares' volume for every trading session. You may also check the index's volume on Sensex, Nifty50, and others.

The seven most frequently used volume indicators are.

  • On Balance Volume (OBV)
  • Money Flow Index (MFI)
  • Negative Volume Index (NVI)
  • Accumulation Distribution line
  • Volume Relative Strength Index (RSI)
  • Klinger oscillator
  • Chaikin Money Flow (CMF) indicator