Understanding Basics of ADTV – Average Daily Trading Volume… (a beginner’s guide)

We often see quite a few posts listed of members buying into certain “lower trading volume” stocks and seeing the charts of them climbing nicely.

Of course, that is great news and I get a few messages from people asking if they should buy into specific stocks, especially as they suddenly seem to be having a spike.

Firstly, you have to remember that I can’t really tell you what stocks to buy as I am not licensed to do that, though I can help you with trading patterns (or Trends) so that you can make a more informed decision. Ok, back to it

So why is Trading Volume important?

Some stocks, especially the cheaper penny stocks, can be bought at higher quantities. If you have £2000 and buy a stock costs 0.002p, then you would own 1,000,000 units of that stock – (let’s keep out stamp and trade costs for now).. Sounds pretty impressive, right?..

So, we bought 1,000,000 units of a stock at 0.002p and the stock has now shot up to 0.005p, and we decide to sell out. Would you believe that this has now turned our £2k into £5k, giving us a £3k profit… How amazing is that?

We now decide to sell our 1,000,000 units as we are more than happy with the profits returned. So we put in a “deal” to sell.

We know that the stock has an ADTV (Average Daily Trading Volume) of around 1.3 Billion and are quite comfortable that it should sell.

Once we put our entire holding up to sell, we are met with a message that we can’t sell it at the moment and please try again in a few moments (depending on the platform you use, the message will be unique to that.. On Hargreaves Lansdown, it is something along the lines of, “currently can’t quote for this, please either requote or try again in a few moments”..

Why isn’t it letting us sell? Maybe the platform we are using doesn’t want us to make so much profit and are trying to temporarily freeze us out?.. (trust me, I have heard this said a few times also)

Most likely reason (unless platform has gone down), is “Supply and Demand”, or, there is MORE SUPPLY and LESS DEMAND. Basically, nobody is there to buy your stock as there are too many people trying to sell at a profit, not just you…. And this is where Trading Volume comes into play.

Remember further up when we said that our stock has a daily trading volume of 1.3 Billion. This now becomes very significant as what it actually means is that the following..

1 Million shares bought by me = 1 Million

10 Million shares each bought by 100 people = 1 Billion

5 Million shares bought by 60 people = 60 Million

If we add all that up, we now have just over 1.5 Billion shares being traded and there is a chance that quite a few people are going to be wanting to get rid as they are now in good profit… Of course, I have oversimplified the process here and not everyone will be selling at the same time, but once SUPPLY is above DEMAND, we will have a problem selling.

What will it mean if this happens?

Well, we could try to sell off our shares in portions, maybe a third at the time… (if you are in this position, this may be the better option).. Or, we could wait until the profit drops a little and then the demand may be higher.. Or, we could hold onto them and hopefully they will keep climbing in value and then try to sell them further along the line.

The problem with the last option is that if we bought them to bag a quick profit and have our strategy planned out, we are now having to veer away from our strategy and also now require HOPE in that it keeps climbing in profit and the value doesn’t whipsaw back down again.

In the above example, we can see that Trading Volume can play a pretty big part and wreak havoc in ones profits and trading strategy, and is something that one should also bear in mind when making trades, especially when trying to make quick trades.

Something to remember is that usually, trading amounts like 1.5 Billion is often more than ok, but in this case, as the stocks are valued at such a fraction of cost (0.002p), then people may be buying in bigger amounts and the 1.5 Billion DTV will soon be hit.

Ok, that is crazy as in your example, their Trading Volume is 1.5 Billion and even a company like Amazon only have an average Daily Trading Volume of 3′(ish) Million!

Bearing in mind that over the last 12 months, yes, Amazons daily trading volume was around 3 Million, but then their stock price is a little more than 0.002p, and also Amazon are more of a Hold Stock, whilst quite often the cheaper ones can be quite susceptible to “Pump & Dump”… (basically means, buy low, wait until price rises, then dump the lot at a profit).. Besides, if you had the funds to buy 1 Million Amazon shares, you probably wouldn’t be reading this article now

Bottom Line:

Depending on the type of trader you are, something to bear in mind is not only the price of your chosen stock, but also the trading volume as this could determine how easy (or difficult) it could be to sell off your holdings, especially when they come into good profit as there is a high probability that you won’t be the only one wanting to sell it off and this could seriously hinder your profits.

Trading Volume also play a big part in pricing and there is a little more to it than what is listed above, but this is just a simple guide to get people thinking about it and start ones thought process down that path.

Hope this helps a little and just something to bear in mind when setting up your trading strategy