What is the share turnover ratio?
Share turnover is a measure of stock liquidity, showing how quickly it can sell shares on the open market. Share turnover is calculated by dividing the total number of shares trading during a certain period.
Share Turnover = Trading Volume / Average Shares Outstanding
- Trading volume: The trading volume is the average number of shares traded in a given period.
- Average shares outstanding: How many shares are issued by a company.
Share turnover measures how easy or difficult it is to sell shares on the open market by comparing the total number of shares issued to the number of shares traded during a certain period.
Let’s see what share turnover tells us:
- A high share turnover ratio suggests that you will find it easier to buy and sell shares because there might be more shares being traded. Alternatively, a low share turnover indicates that buying or selling shares might be difficult.
- 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.
- Companies with higher stock prices will have lower turnover as a single share of stock is more expensive to buy, limiting its liquidity. These types of illiquid assets may help preserve their value during volatility as they can't be bought or sold quickly.
- Stocks with large amounts of seasonality will see their share turnover ratios surge along with the demand for the stock at these times.