Share Turnover: A Complete Guide

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  • 03 Nov 2023
Share Turnover: A Complete Guide

When purchasing stocks, you can conduct extensive research. Yet when selling them, all it takes is one click of the sell button. The stocks are liquidated or exchanged for other equities. Individuals focus only on one metric to make sure a profit is earned. It is the selling price. However, there are a few other important metrics you should take into account when you are selling stocks. Share turnover is One of them. It's vital to understand its concept so that you sell your securities wisely. Let's explore the share turnover meaning, and how to calculate it.

Key Highlights

  • Share turnover is a ratio of the shares purchased and the total outstanding shares.

  • A higher share turnover suggests high liquidity. On the other hand, a lower share turnover implies low liquidity of a stock.

  • Various factors influence share turnover. These include the company size and prevailing market conditions.

  • Share turnover is industry-specific. So, it is suitable for comparing companies belonging to the same industry.

Let’s first define stock turnover. Share turnover is a measure of a stock's liquidity. In other words, a stock's share turnover reflects how simple or complicated it is for an investor to convert a share of that stock into cash. Higher share turnover suggests that the underlying stock has more liquidity. Thus, one can easily convert the share of the stock into cash. Low share turnovers indicate lower liquidity, which makes it more difficult for an investor to sell their shares.

Share turnover is a measure of a stock's liquidity. This is calculated by comparing the number of shares traded over a certain period to the total number of outstanding shares during that period. This means paying attention to a stock's share turnover might help you determine how simple it might be for you to purchase or sell those shares on the open market.

Here, two things should be kept in mind. First of all, a stock's share turnover is not an indicator of the intrinsic value of its shares. Second, while share turnover indicates the measure of liquidity of a stock during a given period, it does not offer any reasons for that. As an investor, share turnovers can be an essential indicator of a stock’s performance. However, it is important not to make assumptions or stock selections on the basis of just share turnovers.

Often, several small-sized companies can have much lower share turnovers than larger companies. So, in many instances, stocks of these companies surprise investors with their high liquidity. On the other hand, large businesses may have stock prices that are too costly for most investors to afford. This results in a lower share turnover. As a result, an investor must always take the specific stock into account when analysing the share turnover of a given stock. It is also important to look at the prevailing market conditions.

Let’s now go through the process to calculate the share turnover of stocks. Share turnover ratios or share turnover rates are two ways to find share turnover. However, one needs additional data in order to determine the share turnover. This includes the following.

  • The total amount of shares of the company's stock purchased during trading.
  • Shares still available for purchase by investors. They are referred to as shares outstanding.

After obtaining the above data, use the following formula to calculate the share turnover.

Share Turnover Ratio = Shares bought during the trading volume / Share outstanding.

The Share Turnover Ratio is an industry-specific indicator that varies across all industries. It does not have a defined range for the stock market. In terms of statistics, you cannot compare the share turnover of a firm in the food sector with a company in the shoe industry because the two industries are fundamentally dissimilar. In this situation, you can compare with either the company's history or with another company in a comparable position and industry. These are the most effective strategies to compare a company's turnover so you can decide which one to invest in.

A company can improve its share turnover by the following steps mentioned below.

1. Listing on Stock Exchanges: There are rules that prohibit investors from purchasing unlisted shares. Listing on a stock exchange allows investors to easily buy a company’s shares. So, companies should move from smaller regional exchanges to larger ones, where the stock will be available to more investors.

2. Splitting Large Holdings: Encourage anyone who has large holdings to sell some of their shares. Or else, the number of shares actually offered for sale would be quite less compared to the total number of shares issued.

3. Preferred Stock Conversion: Encourage preferred stockholders to convert their holdings to a single class of common stock. More shares are accessible to investors when there is only one class of common stock.

4. Splitting Shares: Companies can go for a stock split to lower the share price, making it more accessible to investors.

Conclusion

The share turnover is a ratio of the volume of traded shares with the total number of outstanding shares. To calculate it you will need two things. First is the total number of shares purchased and second is the outstanding shares. Share turnover indicates how easily stocks can be liquidated against cash. In other words, it assists investors in determining whether the timing is right to buy or sell a stock. It holds a lot of importance and serves as a useful indicator in the share market.

FAQs on Share Turnover

The bid-ask spread (difference between the buying and selling prices) is often less in markets with high share turnover. This happens because there is increased competition between the buyers and sellers.

Yes, low share turnover can be a concern for investors. It can lead to less liquidity. So buying or selling shares will be difficult.

You can use share turnover to assess the trading activity of a stock. A sudden increase in turnover may be related to a significant event. You can use this information to make your investment decisions.

High share turnover causes rapid price movements, as larger trade volumes can impact the supply and demand dynamics. Low turnover can lead to stable or slower price changes.

Yes, share turnover can vary significantly across different markets. It mostly depends on the industry.

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