Do stocks that trade with a large daily volume generally have less volatility?

By Chizoba Morah AAA
A:

Stock volatility refers to a drastic decrease or increase in value experienced by a given stock within a given period. There is a relationship between the volume of a traded stock and its volatility. When a stock is purchased in large quantities, the stock price or value goes up sharply, but if the stock is sold in large quantities a few minutes later, the price or value of the stock experiences a sharp decrease. In other words, volatility occurs when there is an imbalance in trade orders for a particular stock.

For example, if all or a majority of the trade orders for a particular stock are "sell orders" with little or no "buy orders", then the stock value will sharply decrease. So, the relationship between a stock's trading volume and its chances of volatility depends on the types of trading orders that are being received. If the stock's traded volume is high, but there is a balance of orders, then the volatility is low.

There are many reasons why volatility might occur in the stock market. Some of those reasons are:

  • Unexpected earnings results - If a company reports earnings that are better than expected, then there will be a lot of buy orders and the stock value increases. However, if the earnings report is lower than expected, then the stock value will go down.
  • Company or industry news - If there is good or bad news from a company or the industry then there is an increase in volatility for the company's stock or the stocks of companies in that industry.

Also, stocks that trade at very low volumes, which are far less liquid than those with higher average volumes, can have a higher volatility than their higher volume counterparts. In relatively illiquid stocks, any trading that is performed can have a drastic effect on the stock price because so few orders are placed. It is almost always safer to trade stocks with higher average trading volumes than stocks that are considered to be illiquid.

For more, see Tips For Investors In Volatile Markets.

This question was answered by Chizoba Morah.

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