Share Turnover: What Is It?
Share turnover, calculated by dividing the total number of shares traded over a given period by the average number of shares outstanding for the same period, is a measure of stock liquidity. Shares of the firm become more liquid as the share turnover rate increases.
The turnover rate of an exchange-traded fund (ETF) or mutual fund (which reflects how actively managed the portfolio is) is not the same as share turnover.
Key Takeaway
- Share turnover measures market liquidity by dividing trading volume by outstanding supply over a certain time period.
- Share turnover reveals nothing about the company’s quality or why it is more or less liquid than other stocks during the measuring period.
- Share turnover should not be the primary criterion for investment since it just evaluates quantity, not quality.
- Stocks with low share turnover ratios are more illiquid, while those with high share turnover ratios are more liquid and easier to buy or sell.
- A stock’s share turnover ratio will most likely be higher for a particular period of time if trading activity is influenced by good or negative news. A larger share turnover may also be indicative of momentum.
Understanding Shares Turnover
The share turnover ratio indicates how easy or difficult it is to sell shares of a certain firm on the open market. It compares the total number of shares that may have been exchanged in a particular period to the number of shares that actually change hands. If a company’s share turnover rate is low, investors may be hesitant to risk their money. However, since the linkages are not always trustworthy, share turnover is an interesting statistic.
Since smaller enterprises are potentially less liquid than bigger organizations, investors often anticipate smaller companies to have lower share turnover. Small enterprises may have a greater share turnover rate than larger organizations.
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Cost is an important consideration here. The share prices of numerous big firms are in the hundreds of dollars. Despite the fact that hundreds of thousands of shares trade on their vast floats every day, the percentage of outstanding shares is really rather little. Smaller enterprises, on the other hand, often have shares that are proportionally less costly; less financial commitment is needed for the opportunity cost of loading and unloading based on development potential. Companies split their stock to keep their shares affordable and, as a result, liquid.
Note: Since frequent trading is hampered by the larger company’s high share price, larger, higher-quality enterprises may have lower share turnover than smaller, lesser-quality ones.
How to calculate the share turnover ratio.
Two statistics are necessary to determine a company’s share turnover ratio. The share turnover formula is:
Share turnover is calculated as trading volume divided by average shares outstanding.
The first value represents the trading volume. The average number of shares traded during a certain time period is known as trading volume. This information is accessible for individual securities on a variety of exchanges and financial information websites.
The second figure represents the average number of shares outstanding. This is the total amount of stock shares that a company has distributed. It is important to realize that this is not a company’s whole approved share count; in many cases, the number of shares in circulation is less than or equal to the total authorized share count.
Understanding Share Turnover.
Unfortunately, since it differs by firm and sector, there is no universal criterion for assessing what makes a healthy share turnover ratio. Furthermore, during times of strong seasonality, share turnover percentages in stocks with considerable seasonality climb in line with stock demand.
Companies with higher stock prices often have lower turnover since acquiring a single share of stock raises the cost and limits liquidity. Unfortunately, when a company does well and its stock price rises, its liquidity might fall, making the shares seem less enticing.
Identifying the desired amount of liquidity for an investor is another aspect of share turnover. During economic downturns, when it is easier to trade on emotions, investors may choose for equities that are more difficult to buy or sell. Because they cannot be acquired or sold as quickly, illiquid assets may assist to preserve their value in the face of market instability. Thus, even if the bulk of investors favor liquid assets, individual individuals may be able to fulfill their investment goals using shares with lower share turnover.
An illustration of share turnover.
The share turnover ratio merely indicates how straightforward it is for investors to trade shares. It does not always provide you information about how well the company that owns the stock is performing. Apple, for example, has more than 16.4 billion shares issued and outstanding as of the end of 2021.
Apple’s share turnover is calculated as 110.78 million divided by 16.4 billion, or 0.68%.
Microsoft, on the other hand, had 7.547 billion outstanding shares at the end of 2021, and on the last day of the year, its 30-day average daily volume was 28.31 million34.
The share turnover for Microsoft is 28.31 million divided by 7.547 billion, or 0.38%.
Initially, it seems that Apple’s stock performed almost twice as well. Meanwhile, these figures serve just as indications of liquidity. Compared to Microsoft, investors traded more Apple stock than there were outstanding shares to trade.
Limitations on Share Turnover
Share turnover is an important measure, but it is not without limitations. Share turnover is unrelated to real financial performance; a stock may begin and finish a trading session at the same price despite maintaining a very high turnover ratio.
Additionally, the share turnover ratio cannot forecast a company’s future path. Consider hearing that American inhabitants will no longer be allowed to acquire gas-powered vehicles owing to government rules. Share prices for concerned companies are likely to fall as investors try to sell their holdings. Because the stock was acquired at a much cheaper price, the share turnover will most likely be high. Even while it’s typically better, this may not always be the case.
How is share turnover calculated?
To calculate share turnover, divide the average number of shares traded during a given time period by the average number of shares outstanding during that same period. The percentage result reflects what percentage of all shares offered for trading were actually traded.
What Makes Share Turnover Critical?
Share turnover may provide investors with information regarding the liquidity of a company. Certain investors felt more at peace knowing they could easily buy or sell stock in a certain company. On the other side, some investors would like less liquidity since it makes it more difficult for dealers to sell their shares impulsively. Share turnover simply shows investors how easily their shares may be sold in the future, but it does not predict how a stock’s price will move.
Which is better: a high or low share turnover ratio?
In general, investors seeking to buy or sell assets quickly should aim for a high share turnover ratio. A high share turnover ratio shows increased liquidity in the stock. If an investor is seeking for stock that is difficult to sell, it is recommended to look for firms with low share turnover projections (which may stabilize its value during emotional trading moments).
How Can a Business Increase its Share Turnover Ratio?
Share turnover is merely a representation of how the market moves a company’s shares, hence a business cannot directly improve its share turnover ratio. A firm has various alternatives for enhancing its liquidity.
A company may split its stock first. A stock split will divide the company’s stock price and make it simpler for new investors to acquire full shares, even if the number of outstanding shares would grow. A business may also perform effectively. If a company begins to perform extraordinarily well and improves its bottom line, more investors will want to buy shares, increasing trading volume and share turnover. You can also read; Outstanding Shares: Definition And How It’s Determined
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