With the advent of electronic trading, it is now a common occurrence to see more than 1 billion shares of stock changing hands each day. Some stocks, however, trade only a few shares per day and others, zero shares. Is the amount of shares traded in a day important to the investor?

Volume

The amount of shares that change hands each day is referred to as trading volume. Some stocks trade hundreds of millions of shares each day while others sometimes trade zero shares. This is a very important indicator for the investor to study when evaluating a stock for purchase.

Validity

There is a rule among professional investors that says, volume equals validity. If a stock trades very few shares in a day, it is difficult for an investor to have a confident picture of its true value. A good rule of thumb is not to trade stocks that have a volume of less than 1 million shares per day for a least 30 consecutive days.

Valuation

A major problem with low volume stocks is that investors don't know the true value. Often the difference between the bid price and the ask price is very large. This, along with low volume is a problem because it can be difficult to sell shares of low volume stock if a price cannot be agreed upon. This is never an issue with higher volume stocks.

Volatility

Because it is more difficult to value a stock with low volume, there are sometimes large swings in the price of these stocks. This can be detrimental to the investor who has purchased a large amount of these low volume, low value stocks. Large amounts of money can be lost rapidly. This is why financial professionals advise most investors to stay away from low volume/low value stocks.

Visibility

Low volume stocks often are not followed by analysts or other investing professionals. This makes finding information on these companies very difficult for the part-time investor who doesn't have access to research teams or high priced publications.

Conclusion

A stock with little or no trading volume should be avoided in nearly all cases. Volume is an indicator of popularity. If other investors don't want the stock, there's always a reason and the reason is rarely good.

Source:

Greekshares.com: Low Volume Stocks

More Information:

Penny Stock Facts