How To Invest: Exactly How Much Daily Volume Should You Look For In A Great Stock? (2024)

If you're looking for news featuring the $4 stock with an average daily volume of 89,000 shares a day, chances are that you won't find it in either the IBD Weekly newspaper or in key stock lists.


Both price and volume are key factors that help fuel big moves in stocks. Let's focus first on volume.

Thinly traded stocks tend to be extremely speculative and unpredictable. Because there is such a limited number of shares, a large purchase by a mutual fund or another big investor can cause a huge spike in the price.

By the same token, if the investor decides to sell, the share price will likely tank. Neither scenario is ideal for individual investors. That's why IBD considers a stock that trades fewer than 400,000 shares per day, based on a 50-day average, as thinly traded.

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Thin, Low-Priced Stocks = Higher Investment Risk

When scouring for watch-list candidates, keep in mind that price matters, too. Unscrupulous promoters of penny stocks can easily manipulate a stock trading less than $5 or $10 a share.

To reduce such risk, it's best to stick with stocks that have a minimum dollar volume of $20 million to $25 million. In fact, the more, the better. Institutions tend to get more involved in a stock with daily dollar volume in the hundreds of millions or more.

Apple (AAPL), currently a member of IBD Leaderboard, currently trades more than 31 million shares per day on average. That huge turnover hasn't stopped the stock from rallying more than 97% since the iPhone giant broke out in January 2017 and cleared a first-stage cup with handle with a 118.12 proper buy point.

You can calculate the dollar volume by multiplying the stock price by the average daily share volume. So a stock that trades at 60 and moves an average of 400,000 shares a day has a dollar volume of $24 million.

That's decent trading liquidity.

How To Invest: Where To Find Average Daily Volume

IBD shows the average daily volume in the upper right corner of the minicharts in the Sector Leaders, Stock Spotlight, Income Investor and other market pages. It's also on in Stock Checkup and IBD charts.

When Vipshop (VIPS) debuted on the NYSE on March 23, 2012, it was priced at 6.50 a share. At the one-year mark, the Chinese stock traded at 28.61 with a daily average volume of 374,800, for a dollar volume of $10.7 million. That would have been considered a highly speculative play.

But by the time the stock cleared a two-month base in July 2013, it was trading near 39 with average daily volume of 680,000. Dollar volume topped $26.5 million.

Vipshop rallied as mutual funds snapped up shares. At the end of Q2 2013, 80 funds owned 97 million shares. As of Q1 this year, 523 funds held 225 million shares.

Today, Vipshop is working on the right side of a gigantic bottoming base.

A version of this column was first published on June 2, 2015. Follow Gondo on Twitter at @IBD_NGondo for more on ETFs, growth stocks and stock market insight.


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How To Invest: Exactly How Much Daily Volume Should You Look For In A Great Stock? (2024)
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