Volumes and why are they important?

One must have come across several parameters and indicators when trying to understand more about the stock market. But, did you know everything except for Stock price and the volumes at a given time are derived values. Yes, you heard it right, every trading indicator or general indicator is derived out of stock price and the volume at which the stock is trading.

what are volumes?

Volumes are number of exchanges that are happening per unit time for a given stock. lets try to understand it in this way – If a stock price moves from 100 rupees to 105 rupees in a minute and there were a total of 200 transaction of hands for the stock in this duration. We say that the volumes are 200 at that point in time. Remember, for every buy there is a sell and vice versa. So, despite the fact that the stock went up or down, the number of buyers are always equal to the number of sellers. Then the question comes up – why exactly does the share price go up or down when the number of buyers and sellers are always the same?
Reason is the market participation – whenever there are more people who are willing to buy a thing at a price than number of people who are willing to sell it – the bias is towards the buying side and thus the price goes up.

Buy why does it go up?
Price goes up in such a situation because, the tendency of the stock market is to bring every share at its equilibrium. Lets look at this in this way – If a stock has more people who are willing to buy it at a price, lets say 100 people are willing to buy Infosys at 1250 rupees. Do you think if the price went up to 1500, still there will be similar number of people willing to buy it? Answer is a clear no, because out of 100, at least 20 would consider it as an expensive bet to purchase. So, now relate it to the things we talked about earlier – Higher the buyer participation – higher will the price go up to bring down their partition or to bring the stock price towards a range where the buyer and seller sentiments are the same.
Isnt it same as what we see in any other market? If people are willing to buy something less in stock the price goes up until the buyer sentiments dies off.

Now lets relate it to volumes

From the above example – Imagine two scenarios

Scenario 1 – Infosys at 1250 and 100 people who are willing to buy it and only 80 people who are willing to sell it.
Scenario 2- Infosys at 1250 and 200 people willing to buy it but only 160 people who are willing to sell it.

Notice in both the cases – Number of buy and sell will be the same, that is 80 transitions for case 1 and 160 transactions in case two. But, in case two there are still 40 people who are left without any purchase order compared to just 20 people in case 1.
Anyhow, the price will go up in both the cases. Because there are still buyers who are yet to place an order for which we need more sellers, how do we get it?
Simple, by increasing the price, because more people will be motivated to sell their holdings at a higher price. But, since in case 2 we had 40 people yet to buy, the momentum here will be faster and more strong.

By now, you must have developed some mental image of how volumes are attached with the strength of a trading stock in a particular direction.