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? on Volume

Fluidollar said: "Does high share turnover (% of shares traded monthly compared to total shares) usually correlate with wide swings in price?"

Rbreb13 said: "Volume works several ways. Its a supply/demand thing. [I]Usually:[/I] If alot of buys/ price will go up. If alot of sells/ price will go down. If equally distributed buys/sells the price will stay flat. These facts are always true, except when they're not!"

Kloewer said: "There's always an equal number of buys and sells...you can't sell without a buyer, right?"

Rbreb13 said: "Not always, sometimes the MM's or specialist will buy or sell shares from their stash to maintain liquidity."

Fluidollar said: "Yea but the point is there's more room for a price swings. For example, take two company with 100 shares each. Company A's monthly share turnover is 20%, whereas company B's is only 10%. Now assume that out of that monthly share turnover, more people want to sell (Supply goes up) than they want to sell. The ratio is the same; for every 10 people involved in a transaction, 7 are looking to sell while 3 are looking to buy. This doesn't mean they all sell immediately; the supply causes the price of the stock to plunge and so some sellers will sell at a lower price than others. Put another way, 70% of the volume is looking to sell and 30% is looking to buy, so the price goes down. But it goes down differently for the two companies despite the same ratio. Company A, with a 20% monthly turnover, means that there will be more sellers than company B, with only a 10% monthly turnover. So the price will fall lower for company A. If that doesn't make sense, how about this. Company 1 has a 3% turnover and Company 2 has a 15% turnover rate. At the most, C1 could only rise the equivalent of 3% (whatever amount that volume correlates to a move in price), whereas C2 could rise 15% times the equivalent price move....this probably doesn't make any sense but I can't write out my reasoning. It just seems that higher % share turnover leaves more room for price swings."

lil dickie said: "I think that volume is the sole reason for volatility. The day never starts with an equal number of buy and sell orders. Big order whipsaw stock prices like crazy."

Fluidollar said: "I'm asking this because I've been revising one of my strategies to increase my returns. I've been beating the market with the strategy, but not by as much as I could be. One important aspect of my strategy is that the stocks I buy must MOVE, meaning I exclude big, slow stocks like Johnson and Johnson, PnG, etc. The way I've been getting this volatility is buying small stocks only, but even some small stocks dont have much volatility. So I look in the investment service I use, Value Line, and for every stock it lists the monthly share turnover. It makes sense that the higher the % share turnover, the more room for the price to move one way or another. I've also noticed that the small stocks listed tend to have higher share % turnover and thus their price fluctuates more. Should I just stick with small stocks as a generalization of fast movers or is share turnover a better choice?"

Rickster said: "You are on to an important concept. Volatile stocks almost always have high daily volume to float ratios. Some stocks turn over their float multiple times in the same day. (Float is essentially the number of shares available for trading.) But be aware that these stocks are a double edged sword. The reason for the volatility (as you surmised) is that a lot of volume (traders) are chasing few shares. That makes the stock price squeeze up and down, creating volatility. The high volatility creates opportunities for profit, but at the same time, the squeezing nature makes getting good executions difficult when you need them most. It is very easy to get caught in updrafts and downdrafts wherein you lose your profits to slippage. Or more commonly, increase your loses. Most of the volume is being created by traders using technical signals. Market makers, and other predators know this. So, they make the stock look like it is going to go one way or the other. Then once they have sucked enough traders into the trap, they reverse directions quickly. This triggers a chain reaction of stop loss orders and traders trying to get out of their rapidly deteriorating positions."