Basic Research: Volume

We’re making good progress through some of the basic research tools you can use as you try to decide what to buy in the stock world. After all, there are so many thousands of stocks and companies from which to choose, don’t you want to have a procedure to narrow down those choices a bit?

I know I do!

So go back to your Web site that you’ve decided you feel comfortable with, be it www.moneycentral.msn.com or www.yahoo.finance.com or whatever. Look at all the information on the screen in front of you, and focus on one called Volume.

Simply put, this is the number of shares that trade in any given stock (both buying and selling) within any given period of time.

I’m noticing the volume for MCD on Friday, February 16 (the last day the market was open as I write this), and it was more than 6.8 million shares! Can you believe that? Almost seven million shares of McDonald’s passed hands last Friday!

Amazing, isn’t it, but not quite as amazing as, say, General Electric’s volume on the same day of more than 31 million shares.

It helps to put the 50 or 100 shares of any given stock that you buy into some kind of perspective, doesn’t it?

But other than shocking us with the high numbers, what can we learn from this volume piece of information that helps us when we want to buy a stock?

First of all, the volume should be high enough that it’s easy for you and me to buy and sell that particular company’s stock. Some companies have such low volume that, when you want to buy 50 shares, for example, there’s no one around who owns 50 shares and is willing to sell. So your buy order sits there for quite a while before it finally gets executed. This doesn’t happen very often, particularly if you buy stocks that have good volume on trading days, but it’s something to be aware of. You want to be able to control the purchase or sale of any given stock, not be at the mercy of other buyers and sellers.

Secondly, you can easily see if there is some unusual activity in the stock on any given day for any particular reason. If the usual volume on a stock is, for example, two million shares traded (on average), and suddenly you notice that four million shares have traded already today, you know “something is up.” Something is suspicious. You can then move on to news items about the company to see if there’s something behind the surge in volume. Are they coming out with a new product? Did the CEO run off with his secretary? Is the company being bought out by a bigger fish? What’s going on here?

It is, as I said, last week, a lot like investigative reporting or criminal profiling. You’re trying to find out why the volume has changed significantly and whether that change means something good or bad for you as a potential buyer.

Another piece of information on the Web site that deals with volume is Average Volume. Usually the amount of time within that average is also given to you. For example, I’m still looking at the MCD information. The average volume for a three-month period was almost six million shares. This tells me that the volume of transactions in MCD on Friday, February 16, was nothing out of the ordinary and probably statistically in line, even though a million more shares traded than the average.

This is information, by the way, that is usually more helpful during market hours than after. It gives you a snapshot of what is going on with the stock while it’s trading during the day, so that you can make better decisions during the day yourself. After the fact, it is an interesting bit of history but not much more. (There are some useful bits of information regarding any particular stock that are useful only, as I just stated, when the market is open. Then there are pieces of research that can help you gain an overall perspective of a particular stock or company, so whether the market is open or not is irrelevant. What you need here is the information to help you make decisions.)

We’re going to move on to some more jigsaw pieces to the puzzle of stock research. Hopefully this is getting easier and easier — practice, practice, practice. Look up what you already know about various companies and stocks. See if you can figure out whether or not they would make good investments based only on what we’ve talked about so far. Then, in the weeks to come, you can expand your base of operations and make even better, more informed choices.

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