Thenumber of shares traded in a single day can be greater than the number of a company's outstanding shares, but this is relatively rare. This high trading volume tends to occur during important company events and is more common with companies that have a relatively small float.
Float refers to the company's shares that are available to be freely bought and sold by the public without restrictions. The value of the float can change for several reasons. For example, a company may decide to repurchase its own shares from the market, which would then reduce the number of shares available for purchase by the public. Alternatively, a company may decide to sell authorized shares from its treasury to the public.
High trading volume is usually marked by a large price movement. This essentially means that there is so much buying and selling of shares that a lot of the shares are changing hands in a single day. This does not, however, mean that every shareholder is selling shares while new holders are taking that shareholder's place. In most cases, the high trading volume is due to some factor or trading catalyst that propels the price of the security up or down.
Key Takeaways
- When a stock's trading volume exceeds the number of outstanding shares, it often means a trading catalyst has occurred that is spurring increased buying and selling activity.
- Examples of events that can boost a company's trading volume include a takeover bid, an initial public offering (IPO), and the results from corporate earnings.
- Day traders will often buy and sell shares of the same company multiple times during the same trading session, thus increasing the trading volume so that it exceeds the number of outstanding shares.
- Short-term traders provide the market liquidity required to trade more shares than the actual shares outstanding.
How Day Traders Impact Trading Volume
Companies receive a large amount of market focus and stock activity during important events. Examples of these events include initial public offerings (IPOs), takeover bids, and the announcement of corporate earnings. These events bring the company to the focus of traders—regular traders and day traders—and increase trading volume. The day traders are trying to make a quick buck on the stock's movement by entering and exiting positions with the intention of only holding the shares for a few hours or even minutes.
Longer-term traders, on the other hand, are buying or selling off of the news, which also contributes to the increased stock activity. The day traders or short-term investors provide the liquidity required to trade more shares than the actual shares outstanding. In other words, while a lot of investors who held the shares before an event will not trade on this particular day, it is the day traders and short-termers that trade the shares many times during a trading session.
Day traders can use a number of strategies to make money, including arbitrage, swing trading, trend lines, and candlestick patterns.
How Trading Volume and Shares Outstanding Interact
Let's assume that the number of shares outstanding in a pharmaceutical company is 10 million. Before the market opens, the company announces that its new drug has been approved by the Food and Drug Administration (FDA) to be sold on the market—a huge breakthrough.
Imagine that half of the shareholders do not sell their positions based on the news and continue to hold them. But five million shares are sold on this news throughout the trading session by investors who may feel that the new drug won't bring in much extra business. Or they might be selling simply to lock in any gains they already achieved. And there will be buyers, with different views and aims, who will buy those shares.
All this activity boosts trading volume. If, say, each of the five million shares is each traded 10 times in a day, this would be recorded as a trading volume of 50 million shares, which is five times more than the number of outstanding shares.
This can happen when a lot of new investors—both long and short term—enter the market. So, while not all shares are being actively traded, a fair portion are, and it is these that are being bought and sold multiple times, resulting in more shares traded, or changing hands, than there are shares outstanding.
