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Understanding high volume stocks is essential for anyone involved in the stock market. These stocks can provide you with a wealth of information about trends and market news when you assess them properly. Nearly every investor should have some high volume stocks in their portfolio. Knowing how to evaluate volume and make decisions based on this information will make you a stronger investor.

  • High volume stocks typically indicate favorable opportunities in the stock market.
  • Major changes in volume will clue you in to significant trends in either the individual stock or the market as a whole.
  • Some types of investor fraud are associated with high volume trades, so you need to know what to watch for.

What Are High Volume Stocks?

High volume stocks are those that have a high trading volume. This is determined simply by the number of shares that are traded in a given period of time. Trade volume is assessed only in terms of the total shares that are bought and sold, not in terms of the number of transactions. Therefore, 10 transactions of 100 shares each gets the same weight as 100 transactions of 10 shares apiece. While you can find charts that average the trading volume over weeks or months, this factor is typically considered only in terms of the previous day’s results.

The number of shares that are traded each day is publicly available, so you can easily determine which stocks have the highest volume at a given time. There are many resources that produce daily lists of the top high volume stocks so you can access this information quickly and easily. While stock volume is just one of many factors that you should consider, it’s worth checking the stock volume leaders each day. Identifying the biggest volume stocks today can point you toward some of the best investments.

Selling Volume vs. Buying Volume

Volume is assessed in two ways in the stock market: selling volume and buying volume. A high buy volume indicates that the stock is desirable. Purchasers are buying the stock at the offer price.

Selling volume happens at the bid price, which is the highest price that buyers are willing to offer. When a seller is open to letting the stock go at the bid price, this means that they no longer find the stock desirable.

You can see both selling volume and buying volume represented on stock charts. If a volume bar is red, this means that it has high selling volume. This indicates a drop in the stock price. A green bar signifies high buying volume and an increase in the stock price.

Average trading volume simply indicates how many times the stock traded hands, regardless of buying volume and selling volume.

Why Are High Volume Stocks Important?

Evaluating stocks by volume traded will give you some important insights. You already know that the stock volume leaders are those that are most popular in a given day, but it’s also worthwhile to investigate why. A high trading volume typically correlates with some other important factors. These shares may be in high demand because:

  • A news event has created more investor interest.
  • There’s an increasing price trend.
  • The stock is consistently popular.

High volume stocks have some typical characteristics. While there can always be outliers, you can generally assume that high volume trading stocks have lower volatility. When stocks change hands often, they tend to experience slow price movements. Whether the stock price goes up or down, it will probably do so in small increments, which reduces your risk. It’s low volume stocks that see the bigger percentage jumps.

High volume stocks also have a smaller spread. With so many orders taking place at a given time, the spread for a high volume stock will be small. The spread is the difference between the lowest ask price and highest bid price. With high volume stocks, the numbers are nearly identical. You might see a spread of 0.0125% for a high volume stock, while a low volume stock will have a spread closer to 0.5%. Trading in high volume stocks, your market order will be filled close to the market price.

What High Volume Can Tell You

As you’re evaluating high volume stocks, it’s important to compare the daily trading volume to other factors. Asking the right questions will help you accurately evaluate the stock’s potential.

Is this regularly a top volume stock?

Some stocks consistently have a high volume. Check the average volume over a three-month period and see if the same leaders are on the list. A stock that’s always traded at a high volume is well-suited to high-frequency traders who use computer programs that make high-speed trades triggered by volume, turnover, and complex algorithms. While it’s difficult to compete with these traders, you can still enjoy stability with a high volume stock that has a long history of performing well.

Is the stock appreciating?

A high volume stock that’s appreciating indicates a sustainable investment option. This is preferable to a stock with similar appreciation on a low volume. High appreciation and low volume often indicate a dead cat bounce, which is a temporary recovery that’s followed by another downtrend. Watching for high volume can help you avoid this hazard.

Did the price drop significantly?

A price drop at a high volume is another key indicator of notable activity in the stock market. A price drop on a low volume stock is rarely notable. However, a price drop on a high volume stock should alert you to a change in the stock market. This is often a warning sign of a reversal. Traders should typically try to get out of positions that are aligned with the current trend when a pending reversal is indicated.

How To Determine Stock Volume

Stock charts always display a stock’s trading volume. There are two ways that you can evaluate this factor. The first is to assess the volume trends for a specific stock. Look for trends in the stock volume. A sudden surge can indicate notable news for that stock. The volume will drop when the stock becomes undesirable and jump when a business move looks favorable.

A sudden increase in volume may also indicate a pump and dump operation, which is a securities fraud in which the price is artificially inflated to increase purchasing volume. This is an illegal act performed by a group of investors. You can avoid this scam by watching for publicized announcements that a stock will jump in price. Messages like this from paid promoters are often indicative of a scam.

The second way that you can approach stock volume is to pull a list of the biggest volume stocks today. This will identify stocks that are trading in big numbers. To gain more insight into this activity, you should also consider the price. High-priced stocks that trade at high volume indicate much greater gains than high volume stocks that are still relatively cheap in comparison to other options on the market.

How To Invest in High Volume Stocks

Investing in high volume stocks is practically required for a strong portfolio. While you don’t have to keep your selection exclusive to high volume stocks, you should include some of these. The following tips will help you do so with the best chance of success.

  • Avoid penny stocks. It’s easier to manipulate the volume with stocks that are trading at a very low price. However, volume is a stronger indicator of profitability when the stock has a dollar volume of $20 million or more.
  • Watch the trends. High volume and low price movement against a trend indicate that the trend is strong. High volume with strong price movement against the trend indicates that a reversal is probably coming. Keep an eye on the trends and buy and sell accordingly.
  • Balance low volume picks with high volume stocks. High volume stocks are generally a better option, but a low volume stock can yield outstanding results if you’re able to make a good prediction. New companies often have low volume stocks but great potential. Balance your portfolio for the best chance of success.

To learn more about wise trading strategies, check out one of our e-books. You’ll find a wealth of information to help you become a better trader.

Author:
Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

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