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.
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 first is the trading volume, which is the total number of shares of the company's stock that were bought and sold during a given time period. The second number is the total number of outstanding shares, which are shares that have been issued to investors and are available for purchase. You divide the trading volume by the average shares outstanding to get a percentage. 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.
Example of Share Turnover and the Limitations of the Ratio
The share turnover ratio only tells you how easily an investor can get rid of shares. It doesn't necessarily tell you anything about the performance of a company behind the stock. Let's look at a large, well-known stock like Apple. At the end of 2018, Apple had approximately 4.8 billion shares outstanding. Its trading volume for December averaged 46.4 million. So Apple's share turnover ratio for the month of December was just shy of 1%. That said, this didn't cause investors to avoid this illiquid stock. So, once again, know that a low share turnover is not necessarily the ratio you should be most focused on as an investor.
If a stock is tanking and no one wants to buy it, that will usually be reflected in low turnover. But if the stock is soaring to the point where a single share costs hundreds of dollars, that will also limit the number of investors who are able to buy in. So these two very different scenarios show up as the same thing when looked at through the lens of share turnover only.