Before you decide whether or not you should make an investment, obtaining all possible information about a stock—including its current price, any projections about its future performance, and other elements—can help you determine whether or not you feel comfortable pursuing the opportunity.
If you’re currently thinking about investing in a particular company’s stock, you may want first to look at its share turnover ratio, a measurement that involves stock sales, which can often provide useful information about some of the investments you’re considering.
Not sure how to determine what the share turnover would be for a given stock? If you don’t know exactly what formula should be used to assess share turnover—or are completely unfamiliar with the term—Jason Colodne of Colbeck Management, a strategic lender that provides capital solutions to meet companies’ evolving needs, has a full breakdown of what you need to know.
What is share turnover?
Sometimes confused with the turnover rate that measures yearly asset exchanges within a mutual fund, share turnover involves buying and selling an individual stock.
How is share turnover calculated?
The ratio is calculated by dividing the trading volume—the total number of shares of a company’s stock bought and sold during a given time period—by the number of outstanding shares available for purchase—ones that could have been traded during the same timeframe.
Can you provide a simple example (real/hypothetical) to accompany your definition?
As AccountingTools points out, if the average number of shares available in a given year were 1 million, 10 million shares being sold during that time period would equate to a 10x share turnover.
What does high share turnover tell you? What does low share turnover tell you? Is either one more ideal than the other?
For investors hoping to determine how easy or difficult selling a stock may be, its share turnover ratio can offer some insight.
Essentially, a high share turnover would indicate a company’s shares are more liquid—or more able to quickly be bought or sold without the stock price being substantially affected—than if the stock has a lower share turnover.
Generally, are there any differences in share turnover between older, established enterprises versus smaller companies?
While investors may assume smaller companies will be less liquid than larger organizations and accordingly have less share-related activity, smaller businesses can experience a greater turnover in certain instances.
Pricing is one potential reason. Because smaller companies’ shares typically aren’t as expensive, less capital can be required to purchase them—and less may be involved in selling them, providing more of an incentive. Market supply and demand, fueled by buyer interest, can also be a factor.
Are there any ways for a company to increase its share turnover?
Companies can theoretically make a number of moves to strengthen their share turnover. Enhancing customer relationships, for example, can help them protect and increase their market penetration.
Utilizing innovation is another approach—such as offering a new type of technology that results in robust consumer demand for the product.
Introducing a cutting-edge, sought-after item could potentially help the company expand its customer base to include a new group of loyal clientele. An innovative, in-demand product release may also offer another key advantage—increased market share—while simultaneously decreasing competitors’ overall percentage of market sales, helping to position the company as a key player in the industry.
Are there any limitations of share turnover? For example, does it not consider enough factors, or does it actually tell the value of a certain stock?
Share turnover involves share quantity; it doesn’t necessarily indicate a stock’s quality—or provide information about what is affecting the stock’s liquidity during a certain period.
What does share turnover mean for individual investors? How can understanding share turnover help them?
A variety of factors can affect share turnover amounts. For instance, with stocks that experience regular, periodic fluctuations every calendar year—such as a spike in retail sales during the fourth business quarter due to holiday shopping—share turnover ratios can rise and fall in tandem with the demand for the stock. As a result, there’s no one specific numeric turnover ratio target investors should necessarily look for.
High and low share turnover totals, however, may offer some information about how stable or volatile a stock is.
A low turnover ratio can imply selling shareholdings of a stock may take some time, and the shares could possibly decline in value before then. A high level of turnover, on the other hand, can suggest investors would have an easier time buying and selling shares.