Investors Chronicle
Listen To The Volumes

What makes people trade stocks? Elementary as this question seems, it gets little attention. This is odd because trading volumes can vary enormously. Last year, the number of FTSE 100 shares changing hands in non-holiday weeks varied between 5bn and 12.5bn. This suggests a major influence on investors behaviour changes significantly. Should we really ignore this? No. New research by Steven Huddart of Pennsylvania State University shows why. He has found that trading volumes increase sharply when share prices are close to their 12-month highs. Although his findings are based on US stocks over the past 20 years, the same appears true of UK stocks now. In the first full week of this month, there were 10 FTSE 350 stocks within 5 per cent of their 12 month highs. For these 10, trading volumes were, on average, twice those of the previous 52 weeks. Volumes for the other stocks in the FTSE 350 were up by an average of just 20 per cent. And there are many cases where a rising price triggers rising volumes. This appears to have happened often to Rio Tinto in the past three years.

Theres a good reason for this pattern, says Mr. Huddart. It lies in prospect theory, an idea about attitudes to risk developed by the Nobel prize-winning psychologist Daniel Kahneman.

This says people take risks to avoid losses, but are keen to avoid risks once they have made a profit. In other words, they will hold on to loss-making stocks- thus taking risk - in the hope of an upturn. But they'll be quick to sell winners. The upshot is that trading volumes will be high when a stock is at the top of a past trading range, as investors cash in their gains. But they'll be low when shares are at the bottom of this range, as investors will be reluctant to sell.

To return to Media Coverage click here .

REPORTERS & EDITORS: For more information, please contact Wyatt DuBois in the Smeal College of Business Media Relations Office at 814-863-3798 or wed112@psu.edu .

Penn State's Smeal College of Business offers highly ranked undergraduate, MBA, executive MBA, Ph.D., and executive education opportunities to more than 5,500 students at all levels. Featuring academic departments of accounting, finance, marketing, insurance and real estate, management, and supply chain and information systems, the college is also home to major research centers such as the Center for Supply Chain Research, the Institute for the Study of Business Markets, the eBusiness Research Center, the Farrell Center for Corporate Innovation and Entrepreneurship, the Center for Global Business Studies, and the Center for the Management of Technological and Organizational Change.

Click here for more news.