Price can lie, volume of transactions does not lie........

There are two basic parameters when one is looking at any particular stock counter during a trading day, it's price and volume of transactions. These two parameters may change during each trading day. And, the price and volume over a period of trading days are almost always different (unless the stock counter is an illiquid one).

For every stock market participants, we are affected by the price and volume of transactions of any particular stock counter. Like it or not, the stock market is an open market for all to participate, so it is a supply and demand principle at work in the many transactions of any stock counter listed on the stock exchange.

Since we are looking at supply and demand in the stock market, we need to know how many outstanding shares of a company is traded on the stock market, also known as it's free float. One also need to know whether this free float is likely to increase or decrease in the future. If free float increases, more shares will be flooding into the market from the particular stock increasing it's supply of shares in the market. On the other hand, shares buy back by the company will ensure some shares are retreated from the market and decrease the supply of shares in the market.

By examining the daily volume of shares transacted for any stock counter, one can also see some insights into the supply and demand situation for any stock counter. When large volume of trasactions occur and the daily volumes of transactions over a period of time experience steady growth, coupled with a growing stock price, the stock is in demand. Just looking at growing price alone over a period of time may be misleading, unless it is supported by a growing volume of transactions over the same period of time too. This shows that "volume of transactions cannot lie" as these are actual recorded transactions of trades made for a particular stock counter over a period of time. However, the "stock price may lie" whereby it is increasing over low volumes of transactions showing the growing price may not be well supported and there may not be a good demand for it's shares just by looking at growing stock price alone.

On the other hand, a decreasing stock price coupled with increasing volumes of transactions over a period of time may mean the demand for the shares of a stock is decreasing. Market participants keep selling the shares by volumes upon volumes at lower and lower prices indicating the desire to get out of a stock. We see this phenomenon in the last bear market when the volume of transactions was large over the entire period of the bear for decreasing stock prices.

So, when one looks at the fluctuating stock price of any counter next time, remember that the "stock price can lie" and an increasing stock price or decreasing stock price may not mean anything. However, when one looks at the volume of transactions together with the changing stock price over a period of time, one sees  the whole picture of the supply and demand for a stock as "volume of transactions does not lie" as it indicates how many shares are changing hands to cause the stock price to increase or decrease.

No matter whether one is a long term or short term market participant, it can be rewarding to estimate the demand for the shares of a stock to know whether one can invest into a stock by checking out if it has growing demand and stock price. Next time, when someone gets excited by an increasing stock price or decreasing stock price, be forewarned that changing stock price may not mean anything much when one does not look at the daily volumes of transactions over the same period of time. Be careful of getting trapped by the fluctuating stock prices when looking at it alone.