When reading the press or books on investment one often comes across the term “Volume”. However there is very rarely any explanation of what it is or more importantly what significance it has. Hopefully this article can shed a little light on what it is, while subsequent articles will explain what significance it has and how it can be used.
First of all what is “Volume”?
Volume is the count of the number of shares that are bought or sold over a specific period, usually one day. Most reporting of Volume figures only report the total volume, however if you go to the London Stock Exchange website.
Enter the code for the company you are interested in and then select it, you will get to a page that gives you the current price and the days volume (all delayed by 15 minutes) . If you now select the “Prices and Trades” tab you get to a page with a further breakdown of the actual trades that have gone though on the day. This includes “Total Buy Volume” and “Total Sell Volume” and below these figures there is a display showing the most recent trades. It should be noted that the interpretation as to whether a transaction is a “Buy” or a “ Sell” is a bit artificial. Every transaction must have a buyer and a seller. When you look at a SETS Level 2 screen you will see that there are two prices quoted for every share, the higher one (The offer) is the price that a market maker is prepared to sell you a number of shares at while the lower price (the bid) is the price that a market maker is prepared to buy shares from you. (The difference between the prices is the “spread”). The London stock exchange works out automatically from the price of a transaction and where it is relative to the “Bid price” and the “offer price” whether a transaction was a buy or a sell. E.g. if it is above half way between the bid and the offer it is a buy if it is below halfway it is a sell.
The figures also show a “Total Buy Value” and “Total Sell Value” and these can be significant because, the total count of the number of shares transacted depends on a number of things and these numbers are not comparable from one share to another.
For example, In September 2011 the “Volume” for Lloyds Bank shares was on average 160 million shares per day. Over the same period that “Volume” for Barclays shares was only 67 million, so it might appear to be less. However the average price of Lloyds in September was 33.84 p while the average price of Barclays was 157p so the transaction value of Lloyds in September was about £54 million ( 0.33 * 160m) while the transaction value of Barclays was £107 million ( 1.56 * 67 m).
The other factor which affects the volume of shares transacted is the number of shares which are available to be traded. (Note this is not necessarily the same as the number of shares which have been issued, see later). For most FTSE100 shares almost all of the shares issued by the company are available to trade. There is a fairly simple relationship between the Market Capital of the company, the price of the share and the number of share issued:
Market Capital= Number of Shares * Price of Shares.
From this you can see the relationship between the size of company and the price of the shares and the number of shares issued. A small company with high priced shares must have fewer shares than a large company with the same price shares.
I stated above that the number of shares available to be traded is not necessarily the same as the number of shares which have been issued. For most FTSE100 shares almost all of the shares issued by the company are available to trade and there is a fairly simple relationship between the Market Capital of the company, the price of the share and the number of share issued:
If you go to the Yahoo site :
and look up a share and then select “Key Statistics” from the left hand menu, you will some figures about share statistics, including the average volume for the preceding 10 days and 3 months, but also what is of interest is the two figures:
What these show is: the “shares outstanding” is the total number shares in issue, while the “Float” is what is called the “Free Float” in other words it is the number of shares which are normally available on the open market. For some companies which started of as private companies or government owned companies some of the shares are withheld from the stockmarket, which means only a fraction of the company is available to be traded on the stockmarket.
For example if you look at Aviva (AV.) on the Yahoo site we find
Shares Outstanding 2.86Billion
Float 2.85 Billion
(Almost the same)
However if you look at Daejan Holdings (DJAN.L) you will see
Shares Outstanding 16.30 million
Float 6.99 Million
In other words less than half the value of the company is available to be traded on the stockmarket.
Who holds the other shares you might ask, well the Daejan Holding web site provides the answer:
“Whilst the Freshwater family retains a controlling interest there are 1,500 shareholders holding shares which have a full listing on the London Stock Exchange.”
Obviously a company that only has a limited number of share available to be traded on the open market can get to the situation quite easily where instead of having a fine balance between buyers and sellers, there can be lots of buyers and no sellers or vice versa. When this happens the shares are suffering from “Liquidity” problems, what this means, if you happen to be holding a share like this when you are trying to sell and nobody wants to buy, the spread between the bid and the offer can get enormous. You will tend to find that shares with limited liquidity will alway have a wide spread, this is the Market makers insurance that they don’t get stick long or short in these shares.
Please note that I am not saying that shares in Daejan suffer from Liquidity problems, I have held them in the past and I have had no problem selling them.
Volume – Courtesy of offthelip
Offthelip graduated from Oxford University with a Degree in Engineering Science, then trained and qualified as a Chartered Electrical Engineer. Worked in electronics design and then software design for many well known companies, e.g. IBM, BT, BAE, General Motors, Thales, ending up as Chief Systems Engineer on a hundred million pound project. More than 40 years experience in using computers, an expert in many types of software, Microsoft Excel being the most well known.
If you would like to contact offthelip regarding RSI then please feel free to e-mail Harry who will get in touch with him for you