What is the 'Average Daily Trading Volume - ADTV'
The average daily trading volume (ADTV) is the amount of individual securities traded in a day on average over a specified period of time. Trading activity relates to the liquidity of a security--when average daily trading volume is high, the stock can be easily traded and has high liquidity; if trading volume isn't very high, the security will tend to be less expensive because people are not as willing to buy it. As a result, average daily trading volume can have an effect on the price of the security.
BREAKING DOWN 'Average Daily Trading Volume - ADTV'When average daily trading volume increases or decreases dramatically, this is a signal that there has been some news released that has affected people's views on the security. Usually, higher average daily trading volumes mean that the security is more competitive, has narrower spreads and is typically less volatile. Stocks are less volatile when they have higher average daily trading volumes because much larger trades would have to be made to have an effect on the price.
Trading Volume and Market Liquidity
The average daily trading volume is an often-cited security trading measurement and a direct indication of a security's overall market liquidity. The higher the trading volume is for a security, the more willing buyers and sellers there are in the market and it is easier and faster to execute a trade. Without a reasonable level of market liquidity, transaction costs are likely to become higher, which in turn discourages trading activities and further reduces liquidity. It is usually the case that the more widely held a security is, the higher its market liquidity may be.
Trading Volume and Price Volatility
A healthy level of trading volume helps maintain price stability with narrower bid-ask spreads. When there are enough buyers and sellers of a security, the market for the security becomes more competitive, resulting in bid and ask prices as quoted moving toward each other with quick transaction settlements. Lower trading volume with fewer market participants, however, would create wider spreads between a buyer's bid price and a seller's ask price. This leads to settlement prices potentially going up and down with different transactions, giving rise to price volatility.
Trading Volume and Trading Momentum
Trading volume is a useful technical metric for measuring trading momentum or sustained up or down price movements. With enough trading volume in an up or down market, large number of buyers or sellers are present and can sustain their respective buying or selling power to overcome the opposite selling or buying pressure. This could cause prices to move upward or downward for extended periods of time. Absent enough trading volume, any up or down price movements may exist only briefly without displaying real trading momentums before the market reverses its course from the lack of sustained market participation.