On a day when the market slumped slightly because of news from the president of the Federal Reserve Bank of San Francisco, and some poor housing and job numbers, Bank of America (NYSE: BAC ) joined the party, ending the day down a little less than 1%. This happened, despite the fact that B of A was the market's second-most traded stock today. Unlike Dow compatriot Cisco, which experienced above-average volume and a 13% gain after earnings topped Wall Street estimates, Bank of America's volume was slightly less than its daily average. Does this mean anything for your average long-term investor? I think not.
Ignore the noise
Go to your favorite financial news source, and chances are that you might see an article reporting the leaders in daily trade volume. But this piece of data may not be as important as it seems. As my colleague Jeremy Bowman points out, this data may incorrectly favor stocks for two reasons: low share prices, and high market caps. For the long-term investor, daily stock moves, regardless of the volume surrounding them, shouldn't influence investment decisions.
If a lot of people are interested in a company, or a stock records nearly 100 million trades in a day, it doesn't mean that anything is necessarily good or bad with the company. It's simply a result of a market that's heavily influenced by high-frequency trading, and the algorithms that run super computers that make investment decisions for hedge funds and other large investors. Sometimes, these computers cause mini "flash crashes," but ultimately, they just add to the "noise" that surrounds the stock market.
Focus on news
A quick check of the financial news shows no big force that should move Bank of America, so it makes sense that today was just a typical day for the banking behemoth. Its below-average volume today shouldn't change your long-term opinion of the stock, and it doesn't mean that it's less of a better buy than it was before. It's important for investors to focus on real news surrounding the companies they invest in, and not worry about how many shares traded hands on any given day.
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