Share Turnover

What Is Share Turnover?

Share turnover is a measure of stock liquidity, calculated by partitioning the total number of shares traded during some period by the average number of shares outstanding for a similar period. The higher the share turnover, the more liquid company shares are.

Share turnover ought not be mistaken for the turnover rate of a mutual fund or an exchange traded fund (ETF), which measures how actively managed the portfolio is.

Figuring out Share Turnover

Share turnover ratio shows how simple, or troublesome, it is to sell shares of a particular stock on the market. It compares the number of shares that change hands during a particular period with the total number of shares that might have been traded during that equivalent period. Investors might be reluctant to put their money at risk by obtaining the shares of a company with low share turnover. All things considered, share turnover is fascinating as a measure in light of the fact that the connections don't necessarily in all cases hold up.

Investors frequently expect that smaller companies will see less share turnover since they are, in theory, less liquid than large companies. Be that as it may, these companies frequently see a greater portion of share turnover compared to large companies.

Part of this is pricing. A few large companies have share prices in the many dollars. Despite the fact that their immense floats mean a huge number of shares can trade a day, the real percentage of the total outstanding is small. Conversely, smaller companies generally have correspondingly less expensive shares; the opportunity cost of loading up and unloading in view of the growth possibilities is smaller in terms of capital commitment. One explanation companies split their stock is to try to keep their shares affordable and, in this manner, more liquid.

Sometimes large, high-quality companies have less share turnover than smaller, lower-quality companies on the grounds that the share price of the larger company is so high it inhibits incessant trading.

Working out the Share Turnover Ratio

To compute a company's share turnover ratio, you want two numbers. The formula for share turnover is:

Share Turnover = Trading Volume/Average Shares Outstanding

The principal number is the trading volume. The trading volume is the average number of shares traded in a given period. Many exchanges or financial data sites will give this data to some random security.

The subsequent number is the average shares outstanding. This is the total number of shares of a stock a company has issued. It is important to note that this isn't the total number of authorized shares a company has; the number of shares outstanding is frequently less (yet might be equivalent to) what they are authorized to issue.

Deciphering Share Turnover

Sadly, there is no rule of thumb for what a sound share turnover ratio is as it relies upon the company and the sector it is in. In addition, stocks with large measures of seasonality will see their share turnover ratios flood alongside the demand for the stock at these times.

Frequently, companies with higher stock prices will have lower turnover as a single share of stock is more costly to buy, restricting its liquidity. This may sadly cause a stock to appear to be less attractive; as a company performs better and its stock price rises, its liquidity might fall.

One more part of share turnover is characterizing an investor's ideal goal for liquidity. During economic slumps where it is simpler to trade on feelings, investors might need stock that is more diligently to buy or sell. These types of illiquid assets might assist with protecting its value during volatility as they can't be bought or sold as fast. Hence, while most investors generally need liquid assets, stocks with lower share turnover might in any case squeeze into the investment goals of certain investors.

Illustration of Share Turnover

The share turnover ratio just lets you know how effectively an investor can get trade of shares. It doesn't be guaranteed to inform you anything regarding the performance of a company behind the stock. For instance, toward the finish of 2021, Apple had roughly 16.4 billion shares issued and outstanding. On Dec. 31, 2021, Apple's 30-day average daily volume was 110.78 million shares. Hence, toward the finish of 2021, Apple's share turnover ratio for the long stretch of December was:

Apple's Share Turnover = 110.78 million/16.4 billion = 0.68%

On the other hand, toward the finish of 2021, Microsoft had 7.547 billion shares outstanding, and its 30-day average daily volume on the last day of 2021 was 28.31 million

Microsoft's Share Turnover = 28.31 million/7.547 billion = 0.38%

Initially, it might appear to be that Apple's stock performed almost two times also. Notwithstanding, these percentages are basically measures of liquidity. Investors traded more shares of stock of Apple relative to the number of outstanding shares accessible to trade than compared to Microsoft.

Limitations of Share Turnover

While it is as yet a valuable measurement, share turnover has its limitations. Share turnover depends no real financial performance; a stock can basically start and end a trading period with an extremely high turnover ratio yet end at precisely the same price as before.

The share turnover ratio likewise neglects to demonstrate the course a stock might head. For instance, envision the news that government regulation will never again allow U.S. residents from buying internal combustion vehicles. Shares of companies influenced would almost certainly fall as investors would try to sell their shares. As the stock gets bought up at a substantially marked down price, the stock's share turnover will probably be high. However a higher share turnover is many times better, that may not generally be the case.

Revision — June 22, 2022: A previous rendition of this article misidentified Apple stock as illiquid.

Highlights

• Share turnover flags nothing about the quality of the stock or why, for the period being measured, it very well might be pretty much liquid than different stocks.
• A higher share turnover may likewise demonstrate energy; on the off chance that uplifting news or terrible news drives trading activity, a stock's share turnover ratio will probably be higher for a given period.
• Since it just addresses the quantity and not the quality, share turnover ought not be utilized as a primary investing criterion.
• Stocks with higher share turnover ratios are viewed as more liquid and simpler to buy or sell, while stocks with lower share turnover ratios show stock is more illiquid.
• Share turnover mirrors the liquidity of a market by partitioning trading volume over outstanding supply for a given period.

FAQ

Is a Low or High Share Turnover Ratio Better?

Generally, a high share turnover ratio is better if investors have any desire to all the more effectively buy or sell securities. A high share turnover calculation means the stock is more liquid. Assuming an investor is intentionally seeking stock that is more hard to sell (which might balance out its value during emotional periods of trading), it would then be better to search out companies with low share turnover calculations.

Why Is Share Turnover Important?

Share turnover conveys to investors the liquidity of the stock they hold. A few investors were more happy with realizing they could undoubtedly buy or sell a specific company's stock. On the other hand, a few investors might need lower liquidity, as this makes it harder for traders to sell their shares emotionally. However share turnover demonstrates nothing about the price movement of a stock, it basically illuminates investors on how effectively their shares might be sold from here on out.

How Do You Calculate Share Turnover?

Share turnover is calculated by separating the average number of shares traded over a given period by the average number of total outstanding shares for that equivalent period. The percentage result addresses what percent of all suitable shares that might have been traded were really traded.

How Could a Company Improve Its Share Turnover Ratio?

A company can not straightforwardly further develop its share turnover ratio, as share turnover is basically an impression of how the market connects with a company's stock. In the event that a company needs higher liquidity, it can do several things.First, a company can perform a stock split. Albeit this will increase the number of shares outstanding, a stock split will partition the company's stock price and make it more open for new investors to buy full shares. Second, a company can perform well. Should a company work on its primary concern and start performing enormously well, more investors will demand the stock, driving up the number of shares individuals trade and expanding the share turnover.