The Curious Investor

Arguably the two most important parts of a stock quote, volume and price should always go hand in hand. Price, while a very interesting number, provides little real information about a stock. As we saw in the P/E ratio post, the price of a stock is really only important relative to other information you can gather on the company or the stock itself. Looking at the daily trading volume of a stock is one method of getting a better prospective on the price or the price change of the stock that day.

The basic idea behind volume is that it is a way of being able to accumulation or distribution of the stock during trading. That is, are investors buying (accumulating) or selling (distributing) the stock that day. To do this, one must look at the price change compared to the volume that day. If the stock trades on heavy volume and the price is increasing, the trading that day is buy dominated and shows that investors were willing to pay higher and higher prices for the stock. If the stock trades on heavy volume and the price decreases, then the trading that day is sell dominated meaning sellers are trying very hard to get rid of their stocks selling for lower and lower prices. If volume is high without an appreciable change in price, it could be a sign of a turn around in a stock’s current price movement. This is known as churning and is a sign that investors cannot really figure out what the price of the stock should be - i.e. whether or not it should continue to move upwards (if there is an upward trend) or whether or not it should continue to move downwards (if it is a downward trend).
Increasing volume day-after-day with a price movement skewed in one direction or another can be a signal that it’s time to either buy (if the price movement is positive) or sell a stock (if the price movement is negative). Something that can help in making these decisions is Volume+. This is a chart available on bigcharts.com in their interactive chart section. It shows volume in different color from day to day corresponding to price advances and declines as well as a moving average of day to day volume so you can see clearly when volume is higher than average.

Aside from looking for above average volume days, price and volume can be used together in a plethora of other ways. There is a whole branch of stock analysis known as technical analysis and specifically volume and price patterning that is based on the idea that certain chart patterns can be found in all stock movements when looking at price and volume charts. The use of these patterns can then be used to predict future stock price movement. As this is just the introduction to reading stock quotes, we won’t go into this right now but I do hope to touch upon some more involved technical analysis in a future series. So, keep your eyes peeled.

Some basic things to look out for if you would like to try to value some stocks right now are:

• Stocks that are making big gains with low volume or non-increasing volume are a signal that the gains are not going to continue for long so don’t buy into the hype.
• Similarly, price declines on low volume are often a sign of people who are weakly holding their position selling off and one can assume either a rebound or flattening out of the price chart is going to follow after those investors have sold their holdings.
• After a period of relatively stable prices (3 months+), a large price gain on high volume can be a sign that the stock is on its way to new heights - this is known as a break out.

This now ends our basic look at Reading a Stock Quote. At this point, we are able to make some decently well informed guesses as to the general value of a given stock and its current trends (up or down) with respect to its price and trading interest (volume accumulation/distribution). It’s not all the information that is necessary to make consistently winning stock picks, but it is a solid foundation from which to begin experimenting with making some stock picks and tracking their performance which I do recommend to anyone interested in beginning to invest. Start a portfolio on CBS markewatch, Yahoo! Finance, or use Investopedia’s Stock Simulator and start to get a feel for it.

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