Average Daily Trading Volume (ADTV)

MoneyBestPal Team
A technical indicator that measures the number of shares traded in a given stock within a day.
Image: Moneybestpal.com

Average Daily Trading Volume (ADTV) is a technical indicator that measures the number of shares traded in a given stock within a day. 

It is computed by dividing the overall volume of shares traded over a period of time by the number of trading days during that period. A stock's ADTV, for instance, is 10 million / 20 = 500,000 shares if its total trading volume over 20 trading days is 10 million shares.

Because it measures the liquidity and market interest in a stock, ADTV is a crucial metric for traders and investors. The ease with which one can purchase or sell a stock without having a material impact on price is referred to as liquidity. 

Market interest is a term used to describe how much attention and demand there is for a stock among prospective buyers and sellers. A higher ADTV typically denotes greater liquidity and market interest, whereas a lower ADTV denotes a lesser level of both.

ADTV can be used for various purposes, such as:

Liquidity assessment

Investors and traders can determine how quickly they can enter or exit a position in a stock without impacting the market price by using ADTV. There are more buyers and sellers in the market when ADTV is higher, which lowers the bid-ask spread and the price impact of trades. The bid-ask spread and the price impact of trades increases when ADTV is lower since there are fewer buyers and sellers in the market.

Volatility analysis

A stock's future volatility can be better understood with the help of ADTV. The level of change in a stock's price over time is referred to as volatility. Small buy or sell orders might have a bigger impact on the price if the ADTV is low, which indicates that the stock is less actively traded. On the other hand, if the ADTV is high, it suggests that the stock is traded more frequently, and massive buy or sell orders may have less of an impact on the price.

Trade execution

ADTV can be used as a benchmark to determine the right trading sizes for a stock. It enables investors and traders to execute trades effectively without significantly altering the price by preventing them from taking positions that are overly large or small in comparison to the typical market activity.

Investment suitability

A stock's suitability for particular investment strategies can be determined by taking ADTV into account. For instance, although long-term investors may favor steady and liquid equities with low ADTV for simpler entrance and exit, day traders may favor highly liquid stocks with high ADTV to profit from frequent price movements.
    To assess their relative liquidity and market interest, ADTV can also be compared between various equities or market indices. For instance, if two stocks have comparable prices but different ADTVs, it indicates that one stock sees more trading activity than the other. In a similar vein, if a stock's ADTV is higher than the industry or market average, it indicates that the market is more interested in it than its competitors.

    ADTV can change over time due to various factors, such as:

    Earnings reports

    Financial records called earnings reports demonstrate how well a company fared during a specific time period. Because investors and traders respond to the results and modify their expectations as a result, they typically have a considerable impact on the stock price and trading volume. Depending on whether earnings beat, exceed, or miss analysts' predictions, earnings announcements can either enhance or reduce the ADTV of a stock.

    News events

    Events that make the news are those that have an impact on a company's or an industry's fundamentals or perception. As investors and traders react to the new information and change their views accordingly, they might also have an impact on the stock price and trading volume. Positive or negative news events can include new product launches, corporate mergers and acquisitions, legal disputes, scandals, regulatory changes, etc.

    Market trends

    Market trends are the overarching orientations or movements of an industry or the stock market over time. As investors and traders observe or foresee the trends and modify their positions in accordance with them, they can also have an impact on the stock price and trading volume. Bullish or bearish market movements indicate rising or decreasing prices, accordingly.

    Let's look at an example using Apple Inc. (AAPL), one of the most actively traded companies in the world, to see how ADTV actually operates. As of December 17th, 2021, AAPL has an average daily trading volume over 50 trading days of 83.6 million shares, according to Yahoo Finance. This indicates that during that time, 83.6 million shares of AAPL were exchanged daily on average.

    However, depending on a variety of variables, this figure can dramatically change from day to day. For instance, on October 28, 2021, Apple Inc. (AAPL) published its fourth-quarter earnings, which due to supply chain concerns missed analysts' projections for revenue and iPhone sales. 

    Because of this, the price of AAPL's stock fell by 4%, and 137 million shares were traded, which was substantially more than the company's typical daily trading volume. Because investors and traders sold their shares or acquired them at a reduced price, this demonstrates that the earnings release had a negative influence on the stock price and a positive impact on trading volume.

    In contrast, AAPL's announcement that it will introduce its self-driving car by 2025 increased the company's share price by 3% and its trading volume to 100 million shares, which was slightly more than its typical daily trading volume. 

    As a result of investors and traders purchasing additional shares or holding onto them in anticipation of future growth, it can be seen that the news event had a favorable impact on the stock price and a minor impact on trading volume.

    In conclusion, average daily trading volume (ADTV) is a technical indicator that counts the shares traded in a certain stock each day. It indicates the liquidity and market interest in a stock and can be used for a number of things, including liquidity assessment, volatility analysis, transaction execution, and investment suitability. 

    The trading volume and stock price of ADTV can change over time owing to a variety of variables, including earnings reports, breaking news stories, and market trends.