Trading Small-Cap Stocks - Why Volume is So Important

A lot of people love to trade small-cap stocks because you can potentially make substantial profits if you invest in the right companies. However as many seasoned investors will know, it's not as easy as it seems. This is why you need to be alerted to the right investments at the right time, and one way of doing that is to look out for high volume stocks.

Volume basically refers to the number of shares that are traded during a particular trading day. It's obviously not that useful when looking at mid or large-cap stocks because they usually see high levels of volume anyway, but when applied to small-cap stocks that normally have very low volumes, it can be absolutely invaluable.

The trick is to look for small-cap stocks that are seeing abnormal amounts of volume. For example if the daily volume for a particular stock is usually around 10,000 shares but the share price suddenly rises after 1,000,000 shares change hands, then this is a major clue that the price is about to move even higher.

This increase in activity could be due to a number of reasons. It could be a director buying shares in their own company, financial institutions taking an interest, or simply just speculation that there may soon be a bid approach for the company. Whatever the reason you can often make a quick profit by jumping on board soon after you notice this dramatic increase in volume.

This is particularly true if the company in question has been unloved for long periods of time. If the share price hardly ever moves and the volume per day is usually minimal, then it can be a great time to jump on board when there is a sudden flurry of buying activity.

Of course you should always do your homework about a particular company before you part with your money, but if the fundamentals are good and the company apparently has a bright future, then it's not a bad idea to invest in them when interest suddenly picks up.

So the point is that with regard to small-cap stocks, you really should incorporate volume into your trading plan. Even if you are investing for the long-term it's still best to invest in shares when there is some interest in them because otherwise they can drift sideways (or downwards) for many months. Plus if you are a short-term trader, you can make some excellent profits by jumping in and out of shares that are suddenly trading higher (or lower) on abnormal volume.

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