Turning up the Volume on Investment Metrics

Two metrics that are tracked by stock investors and in particular day-traders is a stock’s volume and average volume. Volume is defined as the number of shares that have been traded in the most recent trading day. Average volume is the average number of shares that have traded per day a given amount of time i.e. a week, a month, or even longer. 

These two metrics are included on sites that provide stock quotes. Three examples are shown below. (Note that the average volume for Apple varies across the three sites as they are using different time periods to calculate the average.) 

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So why do investors care about these two metrics, and could there possibly be a better way of interpreting this data to achieve more insight? 

To answer the first question, investors care about these metrics because volume and average volume give insight as to the daily sentiment of the stock and which way it is trending. For example, if a stock is up 3% with a volume of 10 million and this stock typically has an average volume of 10 million, there is probably nothing going on that is unique to this company and the market is just having a good day. However, if the stock is up 3% with a volume of 20 million when it typically has an average volume of 10 million, the stock headed up on this day most likely due to news unique to the company. This is an over-simplification, but it gives you an idea. 

To anser the second question, there definitely could be better ways of using this same exact data to extract just a tad more insight into the stock. Consider the two following metrics instead:

1. Volume / Average Volume

For day traders, they may glance at volume and average volume and quickly see if the two are much different. But exactly how different are they? An easier way to interpret this same data is to have a metric that divides volume by average volume to yield the day’s current volume as a percentage of the typical volume. In the case of Apple above, suppose volume is 15M and average volume is 13M, then this metric would be 15/13*(100%) = ~115%. In other words, today’s volume is approximately 15% higher than normal. 

2. Volume as a % of shares outstanding vs. Average Volume as a % of shares outstanding

Another way of looking at these numbers is to ask what chunk of all of the shares outstanding changed hands today? In the case of Apple, there are approximately ~930M shares outstanding. Thus, the volume as a % of shares outstanding would be ~1.61% and the average volume as a % of shares outstanding would be ~1.40%. In addition to showing you the signal of whether or not today’s volume deviates greatly from the average volume, this new metric also shows you on average how large of a chunk of a company is trading hands. One could generalize and say that stocks with a smaller percentage of stocks trading hands are less volatile than those with a larger percentage.