Share turnover refers to the liquidity of a certain stock. Specifically, it 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.
Learn how share turnover works, how to calculate it, and what it means for you.
Definition and Examples of Share Turnover
Share turnover measures a stock’s liquidity, or how quickly it can sell shares on the open market. Share turnover compares the total number of shares issued by a company to the number of shares traded during a certain period.
As an example, let’s compare a large corporation to a small company. The large corporation’s stock is traded 10,000 times daily (i.e., its volume), which might lead you to believe it has a high share turnover. However, if that company has 1 million shares outstanding, the volume being traded is only a small percentage of its total number of shares.
There are many reasons a large corporation could have a low share turnover. One of the most common is that the shares are priced high and investors are holding on to them because they are generating returns and value.
The small company might have a higher turnover because its stock price is more affordable. If this company had 10,000 traded and 500 shares outstanding, it would have a share turnover of 20 times. The large corporation has a turnover of 100 times, but only 1% of its shares were being traded compared to 5% of the smaller company’s shares.
How Do You Calculate Share Turnover?
To measure a company’s share turnover, you need two numbers:
- Trading volume: the total number of shares traded over a given period
- Number of outstanding shares: how many shares issued by a company
You then divide the total number of shares traded in the period by the number of shares issued. This calculation is represented by the following formula, where Tn is the total number of shares traded (volume) in a period, and So is the number of shares outstanding (issued):
Let’s use the following conditions as an example:
- Trading volume (Tn): 2 million
- Number of shares outstanding (So): 10 million
Next, we’ll plug these numbers into our formula:
10,000,000 / 2,000,000 = 5
This means there is a 5 times share turnover.
You can also calculate a share turnover ratio that shows the volume of shares traded as a percent of the total shares listed during a given period:
Using the example above, the number of shares traded (Tn) would be 20% of the total number of shares outstanding (So).
How Does Share Turnover Work?
A high share turnover ratio suggests that you’ll 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.
Apart from measuring liquidity, there is no way to assess “good” or “bad” share turnover. Hutch Ashoo, the founder and CEO of Pillar Wealth Management, told The Balance in an email, “There [are] no set criteria for what constitutes a good share turnover ratio because it varies [by] every company and industry.”
Moreover, share turnover is not a broader indicator of a stock’s value. “The share turnover ratio merely indicates how easy it is for an investor to sell shares,” Ashoo said. “It doesn't necessarily indicate how well a company behind the stock is performing.”
Better performance may even lead to lower share turnover, making it more difficult to sell shares. “When a stock is falling in value and no one wants to acquire it, low turnover is common,” Ashoo said. “However, if the stock rises to the point where a single share costs hundreds of dollars, the number of people who can participate will be limited. When viewed solely through the prism of share turnover, these two very dissimilar events appear to be the same.”
Improving Share Turnover
There are a few ways a company can improve share turnover. Smaller companies may move beyond regional exchanges to larger ones to increase share turnover because larger exchanges widen the investor pool.
When shares are priced too high, a company may conduct a stock split. This lowers the share price, which can make that company’s stock more accessible to lower-budget investors.
What It Means for Individual Investors
By itself, share turnover doesn’t provide a big enough picture to judge whether a stock is a worthy investment.
“[Share turnover] says nothing about the stock's quality or why it might be more or less liquid than other stocks for the time being measured,” Ashoo said. “And because it merely measures quantity rather than quality, share turnover should not be utilized as a major investing criterion.”
Considering other factors in addition to a stock’s share turnover, such as its price-to-earnings ratio, can help investors make informed investing decisions.
- Share turnover refers to the liquidity of a specific stock—specifically, how easy or difficult it is to sell shares on the open market.
- To calculate share turnover, divide the total number of shares traded by the number of shares outstanding.
- Companies with expensive stocks may lower prices by conducting a stock split to improve share turnover.
- Share turnover does not indicate a stock’s value or the company’s performance and should not be used as a major investing criterion.