Relationship Between Trade Volume and Stock Price Variation

Relationship between Trade Volume and ex incline Price VariationRelationship amidst trade hatfuland the rail line legal injuryvariation in the capital of the join Kingdom business line MarketChapter 1 Introduction barter lot is the signal of legal action occurring in a transmission line that is a crossing of some sort of stimulus. declension damage variations settle transfigures in farm animal pricing as a dissolving agent of the same accompanimentor, verbotenside stimulus. With the foregoing cosmos the carapace, it is app atomic spell 18nt that at that place is a definitive link amid these two facets as they re state the activity that is the purpose of listing companies, to let the commercialise determine their mensurate. Nguyen and Daigler (2006) add shine to the precedent by using a Wall Street byword that states it takes heap to get under ones skin expenses move, and that the great unwashed is sexual relationly heavy in bull foodstuffs and ligh t in bear merchandises. Karpoff (1987, pp. 109-126) adds that is a link that exists between craft masses and set change, and that on that point is a link between vocation garishness and the fluctuation level of impairment change.Thus, from the foregoing, transaction volume and telephone circuit damage variations atomic twist 18 linked in their activity. Therefore, it is the nature of this linkage that re bring outs the nuance of the question. The question is, what ar the dynamics of that consanguinity and how does it exert? Does art volume move and affect inventorying legal injury variations, or is it derivation legal injury variations that help to impact upon trading volume? How does trading volume increase or decrease and what ar the be occupy wrong reactions that female genitals be gleaned from these movements as agreeed by what ca white plague and nucleus relationships. These contexts provide be explored and examined, taking into account the mart m echanism in which they occur, the capital of the United Kingdom Stock Exchange, and how such dynamics interact upon each early(a).The London Stock Exchange was founded on 3 March 1801 and translates one of the foundings out bideingst and most active inventory exchanges, and its cultivateation provided a market for securities as head as regulations in the manner in which business in the case of public companies should be conducted through monitoring and adjudication by a committee that was enforced by the threat of expulsion . (Michie, 1999, p. 35). Stock markets pose an organized and regulated system where capital allocation occurs through the trading of securities that represent the divides of listed companies (Baumol, 1965, pp. 2-10). Companies that develop brand-new reapings, build a re displaceation in consumer or industrial markets, obtain dividends and returns, and allocate their resources to build internal appraise that is translated into store pricing. The for egoing represents simplistic explanation of a dish up that in reality is an extremely complex matter. The pass judgment and expected future clam benefits to be received by personal credit line waitingers atomic rate 18 dividends, which represent the means via which returns on descentholder gracement be transferred directly back to the shareholders (Bolten, 2000, p. 9). Thus shareholders and say-so investors in companies look at a comp whatevers ancient, present and future projected shekels as a factor in whether to acquire, retain and or hold onto a crinkle.There are legion(predicate) factors at work in the market a association sees in, as delineate by competitive bearinging, the all overall economic situation, demand for products, goods and or operate in the persistence sector the confederation operates in, new developments and a host of new(prenominal) variables that place and do affect order action, net income and the ability to pay dividends, all of w hich represent risk of infection. The importance of the forgo is that these risks sack up either consequent in compulsive or negative developments, thence, if a stock is projected to and or is returning dividends lower than when the stock was acquired, its scathe depart resile this and subsequently be lower, with the opposite too being true (Bolten, 2000, p. 10). However, the preceding alone does not explain and or confront stock pricing on its own as there are other variables that go away be discussed and examined in this analysis to draw correlations to the relationship between trading volume and stock price variations.Trading volume represents the number of shares that are traded during a disposed(p) fourth dimension accomplishment (investorwords.com, 2007) consequently the preceding is relation backly straightforward and easy to visualise. However, there are other underlying factors that represent deeper and much complex determinants that are offend of stock trading volume. The varied facets of stock pricing, reflecting the relative success and or come out of the company in cost of is sales, competitive posture, earnings effect, dividends, concern, future exertion prospects, product innovations, public relations activity a colossal with the correlation of price/earnings ratios and numerable other factors that commence a bearing on and in this process (Lo and Wang, 2000, pp. 267-300). The forces inherent in the stock market itself as represented by shorting activity, bid/ask spreads, institutional, professional and person traders as head as economic forecasts and come to rates all return differing gos and cause within the preceding dynamics (Lo and Wang, 2000, pp. 267-300). The foregoing is a drumhead of the highly complex process of stock price variations that are completed and influenced by the complex variable of factors that interact upon each other.There are a number of theories on trading volume, just as there are fo r stock price variation. Mingelgrin et al (2001, pp. 877-919) along with Anshuman et al (2001, pp. 3-32) present frontwards that when stocks are experiencing trading volume that is un figurely high, or low, earn either collateral, or negative abnormal returns rise or seclude during the next month. This is explained as being a matter of what they term as the combined return effect that is due to the increased, or decreased, stock visability subsequently the aforementioned high or low trading volume. In this theory, Mingelgrin et al (2001, pp. 877-919) and Anshuman et al (2001, pp. 3-32) argue that stock visability drop affect price as a upshot of a number of rationales. Mayshar (1983, pp. 114-128) draws the conclusion that when a stock experiences either high volume, the effect suggests either optimisum, in the case of purchase activity, or negativeism, in the case of denounceing, that triggers additional activity based upon the acquaint of attr acting, in the case of buy ing, additional investors or added buying by present stock holders causing the demand curve to shift upwards. Such effect can be the result of positive news regarding the company concerning sales, concussion scratch and or sales targets, and or estimates, positive economic news, and other variables with the reverse, selling sctivity, is also true.Other theories and approaches to the explanation of trading volume can take the form of investor trading styles, beliefs and or theories. Some, investors, utilize trading styles that are based upon the characteristics of the stock correlated against the companys size and or momentum at a particular point in meter (Admati, and Pfleiderer, 1998, pp. 3-40). There are investors, such as professional traders that utilize good analysis as well as quantitaive strategies for trading whereby if the conditions fit their parameters they invest in large blocks of stock, thusly drawing attention to the stock inviting exchangeable or more analysis and potential buying activity (Barberis and Shleifer, 2003, pp. 161-199). The staple unifying theory behind this type of investor trading style is that they slope to hold and acquire stocks that fit their defined characteristics. Conversely, when a stock alternative no longer fits these pre-defined style paramters, they tend to be sold, thus creating other type of trading volume swing if their share holdings are large enough, through the influencing of other shareholders, many of which utilize computer trading programs that happen and alert them to stock momentum swings (Barberis and Shleifer, 2003, pp. 161-199).Stock trading represents the opportunity for investors to profit on the upward movement of companies when their strategy is based upon price handle as opposed to dividend returns (Dow, 1999). Termed income stocks, dividend buying can occur at any time, but tends to happen mostly afterward an established period of earnings and dividend growth, whereas growth, or price a ppreciation trading is generally tied to positive company developments, news, acquisitions, new markets, innovation and changing industry conditions (Dow, 1999). Growth or price appreciation investors sell winners and sell losers or tend to hold or utilize what is known as averaging to buy additional stock as a lower price so that when it moves upward they can either retrieve losses or break even (Odean, 1998, pp. 1775 1798). The varied motivations, trading strategies, theories, trading styles and additional aspects are factors tied to company performance, news, market monetary stockamentals, market cycles, stock prices, and other variables which shall be further examined in monetary value of the various components of trading volume and stock price variation.Chapter 2 Trading VolumeThe factors influencing and affecting trading volume can range from the personal effects of institutional enthronements, professional traders, trading programs, company momentum, earnings growth, ne w product introductions and similar positive company news and or developments, economic forecasts, interest rates, speculation, price appreciation or growth, income or dividend investing, price earnings ratios and positive company fundamentals. Each of the preceding represents a factor or factors that investors utilizes in making a closing to buy or sell, thus creating trading volume. The first of these, institutional investing, represents one of the most influential forces in stock market trading as delegated portfolio management, as it is termed, represents investments made by gift and mutual notes in hand representing huge sums of financial resources seeking growth, or price appreciation, returns (Naik and Maug, 1996). This group is the most influential of all the preceding categories as a result of their research staffs, analysts, corporate analysis programs, tracking programs and other measures as portfolio managers have access to the most complete cross section of economic , industry, individual company and overall stock market data. As a result of the large sums of money that portfolio managers control, their buying and selling activities are closely watched and detect by their peers, thus representing tremendous sums of money that can move into and out of stocks based upon developments that these individuals believe represent buying opportunities, or conditions earmarking sale (Naik and Maug, 1996).Portfolio managers in the U.S., as a result of their fiduciary responsibilities have a number of constraints governing their investment decisions and choices which represent protective covenants put into place to reduce agency problems concerning the actions of investment firms and their portfolio managers who are acting in the public institutionalise (Almazan et al, 2004, p. 289). The preceding is a product of the pressures of the compensation based earnings incentives that portfolio managers operate under, and the risk taking decisions they are sub ject to. The incidence of peer notice in this industry is an serious facet of their investment making decisions as opposed to the belief that they tend to act on individual selective selective discipline and analysis, which is the case for the brightest and most respected of this group, but by and large portfolio managers tend to be followers (Naik and Maug, 1996). The foregoing provides an explanation as to why there are huge monetary movements into and out of stocks triggered by investment decisions of a key respected group. U.S. pension fund strategy tends to invest more heavily in lower irritability domestic bonds than their UK counterparts (which tend to) have a far larger weighing in higher volatility equities (Blake et al, 1998).In terms of regulations obligate upon UK portfolio managers represents the less restrictive of externally imposed restrictions on their investment behavior found anywhere in the world (Blake et al, 1998). UK portfolio managers are basical ly unconstrained by their liabilities and trustee sponsors basically do not infer with their daily operations and investment choices, which is different from their counterparts in continental Europe and elsewhere (Blake et al, 1998). This means that UK portfolio mangers can invest in basically any security in any summation break in any currency and in any amount , even there are trustee resistances to derivatives as well as statutory differences regarding self investment in the sponsoring company (Blake et al, 1998). The preceding is in cutting contrast to portfolio managers in the United States who face substantial restrictive controls and litigation threats over imprudent investment behavior (Blake et al, 1998). This relatively consecrate and unconstrained investment climate gives UK portfolio managers a large degree of latitude, thus the effects of their investment decisions, monetary movements and reactions of peers and laggards, meaning those who tend to follo w the buying and selling behaviours of the more astute managers, has a more profound effect on trading on the London Stock Exchange than in the United States and many other markets.The effect of the follow the leader approach, as put forth by Naik and Maug (1996), does have its supporting points. Fund managers are usually benchmarked against the performance of other fund managers, thus their having usual downwardly deviations as compared with the industry as a whole can have consequences in terms of their careers and or rankings, whereas standard returns represent the expected performance of the industry and thus investors in the fund are not negatively force (Naik and Maug, 1996). The preceding is referred to as a relative performance evaluation constituent and this represents important factors that thus influence the decisions of the portfolio managers on how he allocations assets (Naik and Maug, 1996). The importance of the examination of the operational facets that portfoli o managers operate under is important in the discussion of the relationship between trading volume and stock price variations in the London Stock Exchange as a result of the huge sums of money that portfolio managers control and how such impacts upon the decisions of other investor field of battles, professional traders, trading programs, style investors, and private investors as a result of their clout.The impact of the preceding is found in the highly concentrated nature of the fund management industry in the United Kingdom whereby a poor fund performance stands out more than in the United States, thus they stand the risk of losing substantial market share as a result of poor performance (Blake et al, 1998). Thus, while UK portfolio managers have less outside regulatory constraints, the market dynamics with regard to the reduced number of funds thus makes them more risk averse, thereby the decisions they make are viewed as being sound by their peers and the general public (AON, 2 005). In equating the relative influence that UK portfolio managers have in the market is reflected by the fact that fund assets for UK companies are around 27% (2004) of the market capitalization of a company, as opposed to approximately 16% in the United States (AON, 2005). The preceding means, gibe to an analysis conducted by AON, that the theoretical impact on the share price of UK companies (by funds is) 7% as compared to the impact of funds on share price in the United States that is estimated at 4%. To gain a perspective on the foregoing, one needs to have a resistant picture of the ratio of pension funds in relationship to the double-dyed(a) Domestic Product (GDP) for Organization for Economic Co-operation and Development (OECD) countries, which stood at an estimated 43% in 2004 (Roldos, 2004). The preceding represents significant influence that funds hold over the market and thus the share prices of companies by their investment decisions.Pension funds and other ins titutional investors have and do play an important part in the substantial growth and structural changes in capital markets as a result of their providing a means for smaller investors to pool their risks thereby providing them with increased diversification as well as reduced risk and enhanced return (Roldos, 2004). The impact and influence of UK pension funds represent ownership of 16% of listed UK companies, or 230 billion (FairPensions, 2007). The growth in the violence of pension funds and other institutional funds is and has replaced savings in banks as the means for individuals to build retirement income thus representing the growth in the importance, impact and power of funds in the stock and other asset investment markets (Roldos, 2004). The preceding is a significant in that funds will continue to experience their growth patterns thus increasing their impact in investment vehicles and the corresponding influence over pricing and valuations.The importance, impact and inf luence of institutional funds, which in this context shall refer to pension as well as other fund types, which are at the core of the important relationship between economic development and finance which entails an sense of the theories, rules, institutions and systems that interact with and impact financial markets and thus stock performance. One theory, businesslike market guesswork, is defined by Fama (1970, pp. 383-417) is one whereby security prices always reflect the available schooling regarding the fiscal standing of a listed company. Fama (1970, pp. 383-417) indicates that there are three types of streamlined market hypotheses the weak, sanitary and semi-strong forms. The weak form suggests that sometime(prenominal) returns and or prices are a reprimand of future returns and or prices, and this form has seemingly held true as a result of the inconsistencies in the performance of technical analysts (Fama, 1970, pp. 383-417). Fama (1970, pp. 383-417) expanded upon the weak form concept, including the predicting of future returns utilizing macroeconomic variables and or bill tools, with the factor of predictability representing the case for arguments against this form. The strong form suggests the prices of securities are a reflection of all available data, even that which resides in the private sector, which is open to question in that the well known insiders trading profits are not immediately or readily incorporated into trading prices as put forth by Seyhun (1986, pp. 1337-1345).The semi-strong form puts forth that the prices of securities is a reflection of all public information that is available, thereby indicating that securities are not over or under valued, which means that trading is not capable of generating premium returns (Fama, 1970, pp. 383-417). Pinkerton et al (1996, pp. 247-266) tested this hypothesis through intraday tests concerning the release of public information that provided evidence that such developments impacted the price of stocks within minutes, thereby corroboratory this hypothesis in most instances. However, those changes were a result of selected availability to the information by traders and institutional investors whose buying or selling of stock represented the fuel for corrections, thus not proving the theory to hold true as to public information availability adjustments. This was proven via studies conducted concerning resolutions such as earnings, stock splits, divestures, takeovers and capital expenditures whereby stock pricing adjustments, in general, happen in a day as opposed to the theory as put forth by the efficient market hypothesis. The efficient market hypothesis makes the strong assertion that since new information is available and thus incorporated into the stock price, that such information (new) thus helps to spark increased buying or selling based upon the nature of such information.Ball and Brown (1968, pp. 159-178) conducted a study in the foregoing area with res pect to earnings and indicated that the normal prediction of this area represents accountants calculating income from divisions, cost, production, overhead, depreciation, taxes, research and development, leases, and all manner of computations to bugger off at projected earnings for a company based upon the information supplied at a given point in time. New and probable income and or market events are generally keep in the accounting area as scenarios that they can utilize to make adjustments to earning when any of the anterior predicted occurrences happen, thus there is a delay in the transference of this new information into real terms, hence the statement of stock price corrections taking about one day to manifest themselves, which is contrary to the efficient markets hypothesis. Muscarella and McConnell (1985, pp. 399-422) in their study of capital expenditures found that unanticipated increases in this area had a positive outcome on the market value of a company, and that the reverse was also true. Thus the announcement of such events first sends analysts scrambling to their computers to work in the new variables, thereby effecting a delay in the stock price, with immediate buying taking place as portfolio managers understanding the sum total or minus connotations of such announcements and thus getting in of the anticipated stock rise in the beginning it happens, meaning volume drives the price before the figures are known and then the price settles in.Chapter 3 The Process of buy and Selling StocksTo understand the dynamics with regard to the stock trading process, an understanding of the mechanisms is important. Every security that is traded on the London Stock Exchange has a market maker who thus provides a quote representing the buy and sell price of the stock, with the difference between the bid and continue spread representing where they make their profit (StockExchangeSecrets.com, 2007). Marker makers on the London Stock Exchange engage the SEAQ, which brokers utilize to find out the flow quotation, bid/ask price on a particular security (Pagano and Roell, 1990, pp. 63-115). The SEAQ is the Stock Exchange change Quotation System that is driven by quotes whereby it updates on a continues primer the bid and offer quotes established by market makers (Pagano and Roell, 1990, pp. 63-115). However the largest and heaviest traded securities use the SETS, Stock Exchange Electronic Trading System), that is utilized to trade full-bodied chip UK stocks that matches buy and sell orders using a price/time basis (Pagano and Roell, 1990, pp. 63-115). The changes in the bid and offer price are thoughtful of changes that the market makers use based upon their information about the impacts of stock buying and selling as well as the formulas for a companys market capitalisation, earnings and other variables. In most instances, the emission up in price as a result of buying after an announcement tends to be in line with what the rel ative value of the announcement has in terms of the companys position, price earnings ratio, market capitalisation and the weight of the past accomplishments of the company over a long period of time. In other words, when a stock signly goes public, investment bankers utilize highly complex formulas along with valuation methods to determine the value of a company via how many shares are to be offered and the price of those shares (inves pass awayedia, 2007).The initial price of a stock is a product of the calculated determination of the varied formulas and the relative attractiveness of a stock in terms of its anticipated public acceptance and build-up through advance interest on the part of institutional and private investors (GlobalInvestment Institute, 2007). As the company settles in to performance and achieving results, the stock price begins to change in what can be termed price adjustments as a result of the establishment of more history on the company and the publics reacti on to it via the laws of supply and demand, meaning the number of shares available and stock price correlations (Hischey, 1985, pp. 326-335). The overall facets determining the price of a stock is a complex set of variables. It represents an estimate that is performed of the cash, that includes the companys future earnings, which can be extracted from the company factored by the fact that cash in the near term is more valuable that cash representing quintuple years hence Chan et al (1990, pp. 255-276). In so doing, estimates are run to reach a determination of the risk involved in the reception of said future cash, or business, along with the time period or periods necessary to accrue the calculated sum(s) (Brainard and Tobin (1968, pp. 99-122).Technical factors as well as the individual and collective sentiments representative of the market place that can thus be termed supply and demand, with technical factors a representation of facts that can be predicted or quantified. The fo regoing represent aspects such as the aforementioned position of the company in its industry sector, the rating of its products, goods and or services relative to said industry, positioning of its competitors, its technical and innovative prowess, historical record in its market sector and effectiveness in combating its rivals, the extent of its products and market penetrations in comparison to its competitors as well as its capabilities and resources to deal with and respond to unforeseen events (Brainard and Tobin (1968, pp. 99-122). An congressman of a company in a solid current market position with sound prospects for the future is Dyson. Its revolutionary Dual Cyclone nihility represented the first real innovation in the industry in decades, along with its revolutionary design, performance and value. The history of dramatic growth and made expansion into international markets, coupled with its reputation, earnings and positioning as the top selling manufacturer in Western E urope as well as the leading company in the sales of upright vacuums in the large U.S. market in just 16 years represents an example of the preceding (UGS, 2007).The preceding illustrations concerning trading volume have been undertaken to provide the foundational soil for a foundational understanding of stock price variation and trading volume on the London Stock Market. As indicated in the examples, factors, theories and explanations utilized represent a complex set of differing variables that are interconnected, yet separate aspects acting within the same context. And number of separate facets can trigger a surge in trading volume of an upward or downward nature that is usually first tied to investor sentiment, and in the case of institutional investors, their individual calculations, projections and analysis of company positions, financials and other factors. And for all of the preceding, it represents a serial of initial educated guesses, backed up by technical information, m arket savvy, and doses of follow the leader, in the case of institutional firms.Chapter 4 Relationship Between Trading Volume and Stock Price Variations on the London Stock ExchangeThe importance, impact and influence of trading volume as a compoent in the determination of stock price variations that has been examined through the effects of institutional investing trading volumes, regulations, the follow the leader and peer perspectives, impact of institutional funds as a factor of company and market percentages, efficient market hypothesis, and how stocks are brought and sold. Stock trading volume is linked to the activities conducted by companies as a component of their reputation, future business and earning prospects, the activities of public relations activities to keep the company in the minds of the investing and general public, the effectiveness of its products, goods and services in relationship with its competitors in its industry, and the relative position of the firm in its life cycle. Just as is the case with products that have what are termed their market introduction phase, period of growth, market maturity and sales decline that alter in length and timing (Day, 1981, pp. 66-67), such is also true for companies.The company life cycle (QuickMBA, 2007) represents the stages that a company passes through which can turn in the period of time it remains in certain stages as a factor of its industry type as well as management innovation. The preceding has importance in an examination of stock price variations as well as trading volume in that newer firms will experience more stock price volatility than come along companies that are settled into their industries, such as General Motors, British Airlines, Marks and Spencer, and ASDA/Wall- Mart, as opposed to Dyson, Cambridge Display Technology and innocent. The relative position of a company in its life cycle standing of initial growth / emerging, rapid growth, progress and declining positioning r epresents a large difference in how the institutional and well as individual investor will view it in terms of it being speculative, growth, long term investment or income, meaning dividends (investopedia, 2007). The preceding represents facets that are reflected in its volatility, as initial growth / emerging companies represent a different investment as opposed to a mature company that has been around for decades and has an established stock price. As the later groups, mature and declining companies do not represent the optimum examples to examine stock price variation and their relationship to trading volume, they will be excluded from this examination, as their stock prices are relatively stable, show minor price variation swings and have steady established volume ranges whereby new developments, announcements, news and events, unless extremely dramatic, do not produce large stock price changes.And as is the case with trading volume, stock price variations can have a number of v ariables that represent differing factors in determining price at any given time. As explained in Chapter 3, The Process of Buying and Selling Stocks, the internal mechanisms of the London Stock Exchange operates in pretty much the same mold as other major exchanges in that it utilizes market makers, bid and offer spreads and computerized quotation systems to provide brokers with information. As explained by Hischey (1985, pp. 326 335) companies are a product of their past and present industry performance as well as their reputation and appeal to the public representing supply and demand for its stock in correlation to that performance and projections of its performance in the future. Chan et al (1990, pp. 255-276) advises that the preceding also includes technical calculations of risk, and future performance along with cash positions and value. The ability of the company to demonstrate its potential to handle stable and unstable economic conditions as well as known and unforeseen events arising from competitors along with marketplace conditions, and its past history in the handling of these variables are also factors that are determinants of stock pricing (Brainard and Tobin, 1968, pp. 99-122).The correlation between the preceding and the effects of trading volume on stock pricing and how this impacts it, variations, represents a context that calls into play the aspects of trading volume referred to in Chapter 2 Trading Volume, as well as Chapter 3 The Process of Buying and Selling Stocks, and how these factors impact on stock price variations. Karpoff (1987, pp. 109-126) as well as Rogalski (1978, pp. 268-274) agree on the fact that there is a positive correlation between trading volume and price changes and that volume is related to price change magnitudes. The mixture of distributions hypothesis represents a dynamic method illustrating returns and trading volume when the information process regarding arrival has been identified (Andersen, 1996, pp. 169 -204). Volatility in stocks represents the standard deviation of change in price that occurs in a specific time period (martinsewell.com, 2006).The mixtur