The stock market can provide a bevy of financial opportunities, provided the investors have an insight into making the right selection of stocks for their portfolio. To gain this insight into making the right selection, an investor can look to features that can shed light on the performance of certain stocks. One such feature that is commonly availed by investors is the share turnover.
So, what exactly is share turnover and how exactly can it help you, the investor, make the right stock selection. Here is a brief overview of share turnover, its significance as well as a few points to keep in mind before considering this criterion.
What is Share Turnover?
In simple terms, the basic share turnover definition is that it is a measure of the liquidity of a stock. This means that the share turnover of a stock is an indicator of how easy or difficult it is for an investor to convert a share of that stock into cash. High share turnovers indicate that the stock in question has high liquidity and the shares can be easily cashed out. Low share turnovers indicate lesser liquidity and therefore, signify a harder time for an investor to convert his or her shares into cash.
Significance of Share Turnover
As mentioned above, share turnover is the indicator of the liquidity of a stock. This is measured by making a calculated comparison between the number of its shares that have been traded within a given period against the total number of shares that could have been traded within that period.
What this means for you as an investor is that looking out for the share turnover of a stock can help you understand how easy you might find it to buy or sell those shares in the open market.
However, it is important to keep two things in mind. First, the share turnover of a stock is not an indicator of the intrinsic quality of the shares. Second, while share turnover indicates the measure of liquidity of a stock during a given period, it does not offer any reasons for why that is the case.
As an investor, share turnovers can be an essential marker of the performance of a stock. However, it is important to not make assumptions or stock selections on the basis of just share turnovers. One common share turnover example is that several small-sized companies can often be expected to have much lower share turnovers than larger companies. However, the stocks for these companies can often surprise investors with their high liquidity as a result of their share pricing being lower than those for larger companies. On the other hand, large companies can have stocks with high-end prices that can make them less accessible for most investors and hence have lower share turnovers. Hence, an investor must always consider the share turnover of a particular stock in the context of the individual company and the overall market conditions.
How to Calculate Share Turnover
The share turnover for a company’s stock is typically expressed in the form of share turnover ratio, also known as share turnover rate. As mentioned above, the share turnover formula for a stock requires two main components:
1. The total number of shares of the company’s stock that were bought and sold during a given time period, also known as ‘trading volume’.
- The number of shares that are still available to investors for purchase, also known as ‘shares outstanding’.
Hence, the share turnover formula can be expressed as:
Share Turnover Ratio = Trading Volume / No. of Shares Outstanding
It is important to note that there is no single share turnover rate that is considered ideal for all stock investments. At the end of the day, the ideal share turnover rate depends on the company as well as the sector to which the stocks belong. Interested investors for a stock are advised to consider a number of criteria, including share turnover, before making their selection.
For those new to investing in the stock market, share turnover can provide an insight into how easily they can invest in a company in the market. If you are selecting stocks on the basis of liquidity, share turnovers can also be a helpful indicator. However, it is recommended that apart from share turnover, investors consider a number of features before making their pick to ensure that they get a comprehensive idea of a stock’s performance.