1

Stock A has low and consistant daily volume (as in, the daily volume doesn't differ much day to day), and rises slowly and steadily from $30 to $40 in 2 months. There are no news relating to Stock A in the space of these 2 months.

Stock B has low volume, but suddenly over 3 days its volume spikes up in millions, and the stock shoots up from $30 to $40 in the space of 3 days. It hovers around $40 for the remaining 2 months. There are no news relating to Stock B in this space of these 2 months.

What are the implications for the future stock prices of the above 2 stocks? Will Stock A's price have a higher chance to slowly continue to increase, and Stock B's price to have a higher chance to drop back down?

Does it mean that Stock A is "really worth for money" as it slowly increases in value, and that there are speculators bidding on Stock B which might make it riskier?

In all, is Stock A a safer investment, and Stock B a riskier stock to buy?

3

Stock B could be considered to be more risky because it seems to be more volatile - sharp rises on large volume increases can easily be followed by sharp drops or by further rises in the start of a new uptrend.

However, if both A and B are trading on low volume in general, they can both be more on the risky side due to having relatively low liquidity, especially if you buy a large order compared to the average daily volume.

But just looking at the criteria you have included in your question is not enough to determine which stock is riskier than the other, and you should look at this criteria in combination with other indicators and information about each stock to obtain a more complete picture.

  • Hi Victor, thanks for your comments. Why would it be riskier (for both A and B) if it was having relatively low liquidity, and I bought a large amount in proportion to the daily average volume? – Mikey May 12 '14 at 6:40
  • If say the average daily volume was 10,000 and you had 10,000 shares you were looking to sell, your order would take up all the shares being exchanged (on average) per day. You may find it hard to sell your whole order at once at the price you want, so you may have to lower your sell price, sometimes considerably, to be able to sell. This is called liquidity risk. You may have to wait a considerable time to sell at the price you want (sometimes you won't be able to sell at this price), or you way need to lower your price considerably if you want to sell quickly. – Victor May 12 '14 at 10:31

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.