Trading volume represents the number of shares that are traded on a daily basis. If the
number of shares traded are less, it shows that the market is illiquid and there is high price
volatility, whereas high volume shows that the market is liquid and there is less price
volatility. Previous studies have shown a positive correlation between trading volume and
price volatility (Karpoff, 1987). Both the factors, i.e., trading volume and price volatility,
are determined jointly by the same market dynamics. It also consists of valuable information
about a security. Trading volume is affected by the news that flows into the market from
time to time, which in fact brings about change in the response of the investors. In
addition, according to Bessembinder and Seguin (1993), volatility and volume relation is
directly proportional to the nature of investor. Investors always have expectations of some
positive rate of return. They always try to accomplish the higher return with lower risk.
Therefore, to achieve this objective, they observe the market continuously. Based on their
perception, they carefully plan, evaluate and allocate funds to various investible instruments,
which offer safety of principal and continuous return. Investment in equity shares is one
of the avenues which offer greater benefits, along with higher risks (Bharathi, 2009).
Investors’ perception is defined as the process by which an investor selects, organizes,
and interprets market data into meaningful information. If two investors are exposed to
the same stock market under the same apparent condition, how each one will recognize,
select, organize, and interpret the market is a highly individual process based on each
one’s own needs, experience and expectations. To know the influence of these variables
on the investment decision is very important for every investor.
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