What is Volume vs Liquidity?
Investors need to differentiate between volume vs liquidity, as both terms are widely used in stock trading. Volume and liquidity are correlated; however, the two terms are also very different from each other.
The term “volume” in trading refers to the total quantity or the total number of shares that are traded during a given period of time. It is measured across all types of financial commodities, including stocks, bonds, options contracts, futures contracts, etc.
The term “liquidity” refers to the level of rapidity or swiftness with which an asset, financial commodity, or security can be either bought or sold in the market for its market price.
Volume: An Indicator of Liquidity
Trade volume and liquidity are considered interrelated terms on the stock market. It is because trade volume is an indicator of a commodity’s liquidity level. A higher trade volume indicates a greater overall market interest for a particular stock or commodity. The stocks are getting traded more frequently and more rapidly than the ones with lower volume. Hence, a high trade volume is generally an indication of a high liquidity level for a particular security or commodity in the market.
In complete opposition to the aforementioned fact are securities with a lower trade volume. A lower trade volume indicates a low overall market interest in that particular security or commodity. Hence, such securities are being traded less frequently.
Market Preference: Liquidity over Volume
Investors tend to put more weight in liquidity over trade volume when making investment decisions. It is because the liquidity of a security or a commodity is easier to determine along with its implications.
Overall, there is a greater knowledge of trade liquidity and a simple understanding of the implications one derives from a stock’s liquidity level. However, it is not the same as trade volume. Many investors often misunderstand the concept of trade volume. It is only carefully looked at and analyzed by brokers, investment portfolio managers, and other long-time market observers and participants.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below: