Volume and Volatility: A Primer

Volume and volatility are two related concepts, and I don’t entirely understand every nuanced detail, but as I learn, I’ll update this page.  Here’s what I know so far:



The stock market here in the US is generally open Monday through Friday, 9:30 AM to 4:00 PM EST (Eastern Standard Time, or UTC-4).  Volume refers to the number of shares that are traded during a given day.  If a stock’s volume is 500,000, then 500,000 shares are traded.  Of course, this is never constant, and can fluctuate wildly over even a day or two, so the average volume of a stock is often more useful.  Volume is a direct contributor to liquidity.



If a large number of trades occur of a given stock, then the price isn’t likely to fluctuate suddenly.  Think of Apple.  Sure, the price changes, but not quickly.  Some real-world examples may help:


Think of the price of milk.  There are many dairy farmers, and many more people buying milk.  The price has remained relatively constant for years because the volume is so high, and therefore the volatility is low.  One shopper at the grocery doesn’t have but the most minute impact on the supply available to other shoppers.


In contrast, the price of a commercial aircraft (like a 787 or A350) can fluctuate quite a bit because of market demand.  There are a pretty small number of produces of these (two), and a pretty small number of buyers, too.  The purchases of one buyer can more greatly affect the supply of the remaining purchasable aircraft, and therefore the price as they become more rare.


Of course, these are pretty gross over-simplifications of the dairy and aerospace markets, but the ideas, if left simple, translate to stocks immediately; higher volume generally means lower volatility, and lower volume generally means higher volatility.

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