When first starting out investing, no matter what your time
horizon at some point you'll be staring at your computer screen
with an online broker stock screener, wondering what criteria to
use. If it's a robust screener you could looking at dozens of
choices. Stock volume is possibly the most important.
Here is where the KISS method (Keep It Simple Stupid) comes in
handy. Keeping in mind that you want a diversified portfolio of
five or at most six stocks or ETFs. Any more than that as a
beginner can be overwhelming until you fine-tune your trading
style, risk tolerance, and refine your homework approach.
One of the things you need in any investment, whether its
stocks, artwork, or classic cars, is a seller and buyer on each
side of the deal. Assuming you are willing to part with the
investment, once you have purchased it, it's worthless unless you
can sell it. It may be 'worth' a million dollars but if you can't
sell it -- no green will be in your pocket.
This holds true for equities. One of most important elements
in any screen is stock volume. Volume = liquidity, and liquidity
makes it easy to get into and out of positions. There's no arena
more important when it comes to stock volume in emerging markets.
Emerging market ADRs and ETFs' liquidity in particular can be as
low as zero shares traded, with otherwise attractive ETFs like
) falling into this category.
In some of these names a seller could be waiting for days
before a buyer comes along, and by that time the price a buyer is
willing to buy at could be far below your asking price.
Stock volume can be also be used to determine copulation on
the sell or buy side of a big move. It can help you determine if
all the sellers have been shocked out of their positions before a
stock begins to recover.
Stock volume is what helps bring the bid/ask spread to the
smallest delta; highly traded equities will have large volume and
small bid/ask spreads.
Low volume ETFs also have a funny habit of being shut down.
Just because it's listed doesn't mean it will remain if there is
You as the trader need to determine what your comfort level is
for stock volume and how easy you want to get into and out of a
trade. Remember, you could be sitting in a low volume name for a
long time while the market falls apart. When I started out I made
this mistake once, thinking 50,000 in volume was enough. The name
moved higher, well into double territory, only to then find
everyone attempting to exit at the same time. I watched the bid
price drop 30% lower than my asking price.
Do yourself a favor and stay away from low stock volume
names. Every broker and yahoo will give you the daily and 30-day
average volume, and some will tell you the volume right next
to the quote if its below average, average or above average.
Professional traders stay away from low volume traps for very