Question

Is a company's stock value related to its trading volume? Are investors likely to react strongly to fluctuations in the stock price by buying or selling a stock at a high rate? What are the implications of this for the stability of a stock value during volatile period in the U.S. economy?

Answer 1

Is a company's stock value related to its trading volume? Are investors likely to react strongly to fluctuations in the stock price by buying or selling a stock at a high rate? What are the implications of this for the stability of a stock value during volatile period in the U.S. economy?

The fundamentals of stock value and trading volume

In short run, stock price is determined by the supply and demand of particular stock (security). while investing, investors do proper assessment of that particular company based on its past, present and future prospects and according estimate (assume) future value of that particular stock. Also, the is the concept of supply and demand match, means willingness of buying the stock of buyer also depend upon the willingness to sell that particular stock by the seller. If every or majority of investors think that the stock is going to be traded at higher price as compared to previous traded price then definitely the value of stock increases very fast. significantly, the interest of the investors increases fot that particular stock at same time henceforth it increases the opportubities of trading the same in the market. Also, here comes the buyer seller conflict which leads to less spread in the bid price and ask price of actively traded stocks.

Sometimes, it is possible that trading volume doesn't has much impact on the value of the stock or has neutral impact as well. This happens in case of low traded securities where the spread between ask price and bid price is wider. Also, volume of stocks directly related to the interest of the investors for that particular stock plus higher the volume it highly impact the price which is in same sync increases very fast.

The difference can also be seen when company discloses important information likewise it is seen heavily traded funds have less swings whereas less traded or lower volume funds have huge unexpected impact on the value of the stocks as because investors don't do much analysis on the same.

It has always seen that there is high volatility during financial crisis, which has almost seen a drop of 50% sharply. Such volatility scares people and shows high drop in the value as well as volume of the stocks and stock market. It causes contagion like one institution to another institutions and henceforth all the institutions start collapsing and impact entire financial system.