10. Liquidity and Volume: Why They Matter More Than You Think

Investing Styles and Strategies – 10 posts for beginners | Post 10 of 10

Many beginners focus only on price. Experienced investors look at something equally important: how easily a stock can be traded. That is liquidity, and it is measured mainly through volume.

What is volume?

Volume is the number of shares traded during a period, usually a day. You can see it on any stock quote or below a price chart as vertical bars. Some large Indian companies trade crores of shares every day; some small companies trade only a few thousand, or even fewer.

What is liquidity?

A liquid stock has many participants on both sides, so you can enter or exit quickly at a price close to the last traded price. An illiquid stock has few participants, so:

  • The gap between the bid and ask price (the spread) is wide.
  • A single large order can move the price sharply.
  • In a falling market, you may not find anyone willing to take your shares at a reasonable price.

Imagine owning shares you cannot exit when you need the money. That is the real risk of illiquid stocks.

Liquidity: both sides

How to check liquidity

  • Look at the average daily volume over the last few weeks, not just one day.
  • Check the market depth (the order book), which shows pending orders at the best five price levels on each side.
  • Compare the bid-ask spread. A narrow spread is a good sign.
  • Be careful with stocks frequently hitting upper or lower circuit limits, where trading can stall on one side.
Bid – Ask Spread

Volume as a signal

Traders also use volume to judge the strength of a price move:

  • A price rise on high volume suggests strong participation.
  • A price rise on low volume may lack conviction.
  • A sudden spike in volume often means something new is happening – results, news or large participants entering or exiting.

One tool built on this idea is On-Balance Volume (OBV), which adds volume on up days and subtracts it on down days to show whether money is flowing in or out.

Price and volume

Price alone is misleading

Avoid choosing a stock just because its price is low. A ₹5 share is not "cheaper" than a ₹2,000 share; what matters is the value of the business and whether you can trade it easily. Very low-priced, low-volume stocks are also the favourite targets of price manipulators.

Check before you invest

Key takeaways

  • Volume tells you how actively a stock is traded.
  • Liquid stocks let you enter and exit at fair prices; illiquid ones can trap you.
  • Check average volume, market depth and bid-ask spread before investing.

Practise it: try these ideas risk-free with virtual money on GPS-AUTOTRADE India paper trading.

Disclaimer: This post is for education only. It is not investment advice or a recommendation to trade any security. Investments in the securities market are subject to market risks; read all related documents carefully and do your own research.

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