So does an increase in trading volume help or hurt stocks?

Some might suggest that investors should favor stocks with heavy turnover on the grounds that high trading volume is a healthy indicator. That’s a myth.

Actually, companies with low share turnover tend to outperform those with high turnover.

While the level of share turnover is negatively correlated with future returns, changes in share turnover are positively correlated.

What does that mean?

Investors should favor low volume “forgotten” stocks that are experiencing rising interest from investors…in other words, their volume is lower than average…but increasing.

The tendency of stocks to go up on rising volume supports the idea that investors tend to gravitate towards companies in the news.

Behavioral finance experts demonstrate that retail investors tend to be net buyers of stocks in the headlines….regardless of whether the news is positive or negative.

Not surprisingly, after their moment in the sun, those stocks tend to go on to have subpar returns.


About the Author:

Mark Tepper, CFP

Mark Tepper is President and CEO of Strategic Wealth Partners, a wealth management firm based in Independence, Ohio, and host of The Capitalist Investor podcast. Follow him on Twitter @MarkTepperSWP.

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