July 09, 2025
4 mins read
Some stocks are easier to buy or sell than others as they are more liquid. To assess a stock's liquidity, share turnover is an important indicator. To understand the share turnover, you need to divide the total number of shares traded during a time frame by the average number of shares during that same period. If the share turnover is higher, it means the stock is liquid and frequently traded, and vice-versa. As an investor who wants easy buying or selling of a stock, share turnover can be a helpful figure.
Institutional investors or traders who look for large volumes may go with stocks with high turnover. However, you must note that the share turnover is different from the turnover rate of an exchange-traded fund (ETF) or mutual fund. In this guide, we will discuss why share turnover is important and how it can be derived. So, read on for more details.
Share turnover is an important gauge of the liquidity of a stock, which measures how often a firm's shares are exchanged within a given time. It is calculated by dividing the number of shares exchanged by the average number of shares outstanding over the same period. A higher ratio indicates that the stock is actively traded and hence more liquid—i.e, more favourable for investors to buy or sell shares without causing a meaningful impact on the market price.
This can be very attractive to traders and institutional investors who want smooth execution and narrow bid-ask spreads. It's worth noting, though, that share turnover simply measures trading volume against supply; it says nothing about the health, performance, or investment promise of the company. The correct interpretation of share turnover demands an understanding of a number of subtleties.
For example, a high ratio of turnover might result from momentum, prompted by news, earnings announcements, or sentiment, rather than sustainable value. Also, smaller firms tend to have higher percent turnovers just because a small float makes even modest volume register
In contrast, big-cap stocks with high-priced shares may have lower turnover rates because selling several shares is a small percentage of total outstanding. As share turnover only measures quantity and not quality, it should not be employed alone. Investors must use it together with valuation multiples, underlying factors, and industry norms to establish a holistic picture of a stock's attractiveness and tradability.
Share turnover is a useful metric that helps investors evaluate how frequently a company’s shares are traded over a specific period. It reflects the stock’s liquidity and trading activity. A higher share turnover ratio generally indicates greater liquidity, meaning the stock can be bought or sold easily without causing major price changes.
This is particularly important for institutional investors who need to move large volumes. On the other hand, a lower turnover ratio might suggest limited trading activity and less liquidity, which can make it harder to enter or exit positions efficiently.
To calculate share turnover, you divide the total trading volume of a stock during a particular period by the average number of shares outstanding during that same period. The trading volume includes all shares that changed hands, both purchases and sales, while the average shares outstanding can be taken as the average of shares at the beginning and end of the period. This gives a ratio that can be expressed as a decimal or percentage.
Formula:
Share Turnover = Trading Volume ÷ Average Shares Outstanding
Example:
If a company trades 500 lakh shares in a month and has 5,000 lakh shares outstanding on average,
Share Turnover = 500 ÷ 5,000 = 0.10 or 10%
This means 10% of the company’s shares changed hands during the month.
Share turnover is a useful tool in several aspects. These include:
It indicates that a high share turnover ratio reflects a highly liquid stock, i.e., investors can quickly purchase or sell the shares without substantially influencing the price.
High turnover stocks tend to receive greater attention from investors and traders, reflecting active participation and interest in the market.
Increased turnover typically results in narrower bid-ask spreads, facilitating smoother and cheaper trade execution for institutional and retail investors.
An unexpected increase in turnover could indicate price movement or momentum initiated by news, earnings announcements, or sentiment.
Share turnover is used by investors to compare liquidity among different stocks or sectors to enable them to select securities that are compatible with their strategy and risk preferences.
Large investors prefer stocks with higher turnover to avoid slippage and to enter or exit positions with minimal price disruption.
While useful, share turnover doesn’t reflect a company’s financial health or performance, it only shows how frequently shares are traded.
Traders often analyse share turnover along with price movement to confirm trends, breakouts, or reversals.
Liquid stocks with stable turnover tend to be easier to handle in terms of entry/exit, so they are less risky in fluctuating markets.
There are several factors that may influence share turnover. Some of these are:
Stocks that can readily be bought and sold tend to have higher turnover. More liquid markets have a larger number of traders, so more activity occurs.
Positive or negative news, earnings announcements, or economic events can influence investor sentiment, driving behaviour, volume, and turnover.
Stocks with high price volatility are traded more by short-term traders, resulting in more turnover.
Firms with a low float (stocks available for public trading) may have high turnover ratios despite lower absolute volumes.
Some sectors, such as technology or financials, may naturally have more trading due to interest in the sector by investors, which affects turnover.
Stocks included in prominent indices (e.g., Nifty 50, S&P 500) tend to have higher turnover since they get purchased and sold by index funds and ETFs.
Stocks that consistently have high daily or weekly turnover typically have higher turnover ratios.
Policy revisions, tax reforms, or new compliance regulations may influence investor behaviour and hence turnover.
Dividends, mergers, stock splits, or changes in leadership can induce additional trading activity and increase turnover.
Share turnover is an important measure of a stock's liquidity and trading activity. It allows investors to gauge the ease with which they can enter and exit positions without affecting the price of the stock. Though increased turnover indicates high market interest and easier trade execution, it must be weighed against other financial indicators.
Share turnover is not a gauge of a firm's quality or performance but is a useful tool for the analysis of market action and sound investment decisions.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. Bajaj Broking Financial Services Ltd. (BFSL) makes no recommendations to buy or sell securities.
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Share turnover is calculated by dividing the total number of shares traded during a specific period by the average number of shares outstanding during that same period.
It indicates a stock's liquidity, helping investors assess how easily they can buy or sell shares without impacting price significantly, aiding smoother and more efficient trade execution.
Factors include stock liquidity, public float, investor sentiment, company news, share price volatility, market trends, industry type, and inclusion in market indices.
Turnover varies by industry; tech and financial sectors often have higher turnover due to active trading, while utilities and manufacturing may have lower turnover due to stable investor interest.
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