What Is Share Turnover?
Share turnover is a measure of stock liquidity, calculated by dividing the total number of shares traded during some period by the average number of shares outstanding for the same period. The higher the share turnover, the more liquid company shares are.
Share turnover should not be confused with the turnover rate of a mutual fund or an exchange traded fund (ETF), which measures how actively managed the portfolio is.
- Share turnover reflects the liquidity of a market by dividing trading volume over outstanding supply for a given period.
- Share turnover does not signal anything about the quality of the stock or why, for the period being measured, it may be more or less liquid than other stocks.
- Because it only speaks to the quantity and not the quality, share turnover should not be used as a primary investing criterion.
- Stocks with higher share turnover ratios are considered more liquid and easier to buy or sell, while stocks with lower share turnover ratios show stock is more illiquid.
- A higher share turnover may also indicate momentum; if good news or bad news drives trading activity, a stock's share turnover ratio will likely be higher for a given period.
Understanding Share Turnover
Share turnover ratio indicates how easy, or difficult, 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 could have been traded during that same period. Investors may be unwilling to put their money at risk by acquiring the shares of a company with low share turnover. That said, share turnover is interesting as a measure because the correlations don't always hold up.
Investors often assume that smaller companies will see less share turnover because they are, in theory, less liquid than large companies. However, these companies often see a greater portion of share turnover compared to large companies.
Part of this is pricing. Some large companies have share prices in the hundreds of dollars. Although their huge floats mean hundreds of thousands of shares can trade a day, the actual percentage of the total outstanding is small. In contrast, smaller companies usually have correspondingly cheaper shares; the opportunity cost of loading up and unloading based on the growth prospects is smaller in terms of capital commitment. One reason companies split their stock is to try to keep their shares affordable and, therefore, more liquid.
Sometimes large, high-quality companies have less share turnover than smaller, lower-quality companies because the share price of the larger company is so high it inhibits frequent trading.
Calculating the Share Turnover Ratio
To compute a company's share turnover ratio, you need two numbers. The formula for share turnover is:
Share Turnover = Trading Volume / Average Shares Outstanding
The first number is the trading volume. The trading volume is the average number of shares traded in a given period. Many exchanges or financial information websites will provide this information for any given security.
The second 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 is not the total number of authorized shares a company has; the number of shares outstanding is often less (but may be equal to) what they are authorized to issue.
Interpreting Share Turnover
Unfortunately, there is no rule of thumb for what a healthy share turnover ratio is as it depends on the company and the sector it is in. Moreover, stocks with large amounts of seasonality will see their share turnover ratios surge along with the demand for the stock at these times.
Often, companies with higher stock prices will have lower turnover as a single share of stock is more expensive to buy, limiting its liquidity. This may unfortunately make a stock seem less desirable; as a company performs better and its stock price rises, its liquidity may fall.
Another aspect of share turnover is defining an investor's desired goal for liquidity. During economic downturns where it is easier to trade on emotions, investors may want stock that is harder to buy or sell. These types of illiquid assets may help preserve its value during volatility as they can't be bought or sold as quickly. Therefore, while most investors generally want liquid assets, stocks with lower share turnover may still fit into the investment goals of some investors.
Example of Share Turnover
The share turnover ratio only tells you how easily an investor can get trade of shares. It doesn't necessarily tell you anything about the performance of a company behind the stock. For example, at the end of 2021, Apple had approximately 16.4 billion shares issued and outstanding. On Dec. 31, 2021, Apple's 30-day average daily volume was 110.78 million shares. Therefore, at the end of 2021, Apple's share turnover ratio for the month of December was:
Apple's Share Turnover = 110.78 million / 16.4 billion = 0.68%
Alternatively, at the end 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%
At a glance, it may seem that Apple's stock performed nearly twice as well. However, these percentages are simply measures of liquidity. Investors traded more shares of stock of Apple relative to the number of outstanding shares available to trade than compared to Microsoft.
Limitations of Share Turnover
While it is still a useful measurement, share turnover does have its limitations. Share turnover doesn't rely any actual financial performance; a stock can simply begin and end a trading period with a very high turnover ratio but end at the exact same price as before.
The share turnover ratio also fails to indicate the direction a stock may be heading. For example, imagine the news that government regulation will no longer allow U.S. citizens from buying gas-powered vehicles. Shares of companies impacted would likely fall as investors would seek to sell their shares. As the stock gets bought up at a materially reduced price, the stock's share turnover will likely be high. Though a higher share turnover is often better, that may not always be the case.
How Do You Calculate Share Turnover?
Share turnover is calculated by dividing the average number of shares traded over a given period by the average number of total outstanding shares for that same period. The percentage result represents what percent of all available shares that could have been traded were actually traded.
Why Is Share Turnover Important?
Share turnover communicates to investors the liquidity of the stock they hold. Some investors were more comfortable knowing they could easily buy or sell a specific company's stock. Alternatively, some investors may want lower liquidity, as this makes it harder for traders to emotionally sell their shares. Though share turnover doesn't indicate anything about the price movement of a stock, it simply informs investors on how easily their shares may be sold in the future.
Is a Low or High Share Turnover Ratio Better?
Generally, a high share turnover ratio is better if investors want to more easily buy or sell securities. A high share turnover calculation means the stock is more liquid. If an investor is intentionally seeking stock that is more difficult to sell (which may stabilize its value during emotional periods of trading), it would then be better to seek out companies with low share turnover calculations.
How Can a Company Improve Its Share Turnover Ratio?
A company can not directly improve its share turnover ratio, as share turnover is simply a reflection of how the market interacts with a company's stock. If a company wants higher liquidity, it can do several things.
First, a company can perform a stock split. Although this will increase the number of shares outstanding, a stock split will divide the company's stock price and make it more accessible for new investors to buy full shares. Second, a company can perform well. Should a company improve its bottom line and begin performing tremendously well, more investors will demand the stock, driving up the number of shares people trade and increasing the share turnover.
Correction—June 22, 2022: A previous version of this article misidentified Apple stock as illiquid.