Most stocks traded in the United States have a consistent volume profile, which shows how a stock trades throughout the day on an exchange. Traders sometimes refer to the volume trends when deciding the best time to buy or sell a stock. The volume map can show periods of increased liquidity, indicating when there are sufficient buyers and sellers in the market. This information enables traders to improve their stock executions. Stocks traded at these times, however, could also be expensive because of the increase in the number of people trading them.
A stock's volume often fluctuates as much as its price. However, the volume profile of most stocks resembles a U-curve, indicating higher activity at the market open or higher volume activity toward the close. This sometimes arises from news about the stock issuer prior to the opening or following the close of the market. For example, a company's profit earnings released before the open can cause people to buy or sell large quantities of that stock. Company news information is usually released outside the normal market hours to prevent irrational trading of a stock.
Federal Open Market Committee announcements about the raising or lowering of interest rates also affect trading volume. For example, a decision to lower interest rates will cause bond holders to move their investments away from bonds toward stocks in order to seek a higher return. In turn, the volume of stocks traded on the exchange can spike. The Fed announcements often are made around midday.
Option contracts are financial instruments whose value is based on the underlying price of a particular stock. Options, which give the holder the right to buy or sell stock when it reaches a particular price, are often used by traders to speculate on the direction of a stock’s price. Option contracts usually expire the third week of every month, and traders often try to cover their bets before the options expire. This leads to higher volumes traded on the underlying stock as traders try to hedge their bets by buying or selling equities on the exchanges.
Another stock exchange feature to follow is the month-end trading volumes. This is because it lines up with the time that most portfolio managers may seek to rebalance their portfolios. High volumes occur at month-end because some managers may seek to readjust their portfolios based on the profit reports coming out of certain companies. To readjust their portfolios, trade managers can sell some stocks or buy into others in order to take advantage of new opportunities. In turn, individual stock traders frequently pay attention to the higher volumes at month's end. Other periods of note are end of quarter and end of year.
Victor Rogers is a professional business writer who started his career as a financial analyst on Wall Street. He later expanded his experience to content marketing for technology firms in New York City. Victor is an alumnus of St. Lawrence University, where he graduated with honors in economics and mathematics.