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WIKI ANALYSIS| This article is part of WikiProject Definitions. Consider editing to improve it. View articles referencing this definition. |
The average daily volume is the average amount of shares traded daily for a particular security.
Also known as average volume or average daily trading volume, the average daily volume is a measure of the liquidity of a stock based on the number of shares that trade hands from sellers to buyers each day. If a buyer purchases 100 shares, then the volume for that period increases by 100 shares from that transaction.
When the average daily volume is high, the stock can be easily traded and has high liquidity. However, if the average daily volume is low, the security is less liquid and harder to trade because there are fewer buyers and sellers for the stock. Securities with low average daily volumes (for example, fewer than 50,000 trades a day) are susceptible to higher volatility because sellers have more control over the price of the security. Securities with higher average daily volumes are more competitive and therefore less volatile.
Average daily volume tends to increase or decrease dramatically when a company submits earnings releases that are counter to analyst estimates.
Examples
Consider an extreme case of low average daily volume where there is only one seller of a security. If you want to buy that security from the seller, you have to accept their price because there is no one else competing for the sale. Later, as an owner of this low average daily volume security, the company releases horrible earnings news. Now, wou want to sell the security, however, because there are very few buyers for security, you are stuck with it.
In another case, you have two securities you're considering purchasing. Everything about the two companies is equivalent -- share price, earnings, demographics, etc. -- except, one of the securities has a higher trading volume than the other. In this case, purchase the company shares with the higher trading volume. This will ensure you purchase the shares at a competitive price and will have a better chance of selling the shares in the future.
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