Share Turnover: Definition, What It Signals, Formula, and Example

What Is Share Turnover?

Share turnover is a measure of stock liquidity, calculated by dividing the total number of shares traded during some period by the average number of shares outstanding for the same period. The higher the share turnover, the more liquid company shares are. 

Share turnover should not be confused with the turnover rate of a mutual fund or an exchange traded fund (ETF), which measures how actively managed the portfolio is.

Understanding Share Turnover

Share turnover ratio indicates how easy, or difficult, it is to sell shares of a particular stock on the market. It compares the number of shares that change hands during a particular period with the total number of shares that could have been traded during that same period. Investors may be unwilling to put their money at risk by acquiring the shares of a company with low share turnover. That said, share turnover is interesting as a measure because the correlations don't always hold up.

Investors often assume that smaller companies will see less share turnover because they are, in theory, less liquid than large companies. However, these companies often see a greater portion of share turnover compared to large companies.

Part of this is pricing. Some large companies have share prices in the hundreds of dollars. Although their huge floats mean hundreds of thousands of shares can trade a day, the actual percentage of the total outstanding is small. In contrast, smaller companies usually have correspondingly cheaper shares; the opportunity cost of loading up and unloading based on the growth prospects is smaller in terms of capital commitment. One reason companies split their stock is to try to keep their shares affordable and, therefore, more liquid.

Calculating the Share Turnover Ratio

To compute a company's share turnover ratio, you need two numbers. The formula for share turnover is:

Share Turnover = Trading Volume / Average Shares Outstanding

The first number is the trading volume. The trading volume is the average number of shares traded in a given period. Many exchanges or financial information websites will provide this information for any given security.

The second number is the average shares outstanding. This is the total number of shares of a stock a company has issued. It is important to note that this is not the total number of authorized shares a company has; the number of shares outstanding is often less (but may be equal to) what they are authorized to issue.

Interpreting Share Turnover

Unfortunately, there is no rule of thumb for what a healthy share turnover ratio is as it depends on the company and the sector it is in. Moreover, stocks with large amounts of seasonality will see their share turnover ratios surge along with the demand for the stock at these times.

Often, companies with higher stock prices will have lower turnover as a single share of stock is more expensive to buy, limiting its liquidity. This may unfortunately make a stock seem less desirable; as a company performs better and its stock price rises, its liquidity may fall.

Another aspect of share turnover is defining an investor's desired goal for liquidity. During economic downturns where it is easier to trade on emotions, investors may want stock that is harder to buy or sell. These types of illiquid assets may help preserve its value during volatility as they can't be bought or sold as quickly. Therefore, while most investors generally want liquid assets, stocks with lower share turnover may still fit into the investment goals of some investors.

Example of Share Turnover

The share turnover ratio only tells you how easily an investor can get trade of shares. It doesn't necessarily tell you anything about the performance of a company behind the stock. For example, at the end of 2021, Apple had approximately 16.4 billion shares issued and outstanding. On Dec. 31, 2021, Apple's 30-day average daily volume was 110.78 million shares. Therefore, at the end of 2021, Apple's share turnover ratio for the month of December was:

Apple's Share Turnover = 110.78 million / 16.4 billion = 0.68%

Alternatively, at the end of 2021, Microsoft had 7.547 billion shares outstanding, and its 30-day average daily volume on the last day of 2021 was 28.31 million

Microsoft's Share Turnover = 28.31 million / 7.547 billion = 0.38%

At a glance, it may seem that Apple's stock performed nearly twice as well. However, these percentages are simply measures of liquidity. Investors traded more shares of stock of Apple relative to the number of outstanding shares available to trade than compared to Microsoft.

Limitations of Share Turnover

While it is still a useful measurement, share turnover does have its limitations. Share turnover doesn't rely any actual financial performance; a stock can simply begin and end a trading period with a very high turnover ratio but end at the exact same price as before.

The share turnover ratio also fails to indicate the direction a stock may be heading. For example, imagine the news that government regulation will no longer allow U.S. citizens from buying gas-powered vehicles. Shares of companies impacted would likely fall as investors would seek to sell their shares. As the stock gets bought up at a materially reduced price, the stock's share turnover will likely be high. Though a higher share turnover is often better, that may not always be the case.

Correction—June 22, 2022: A previous version of this article misidentified Apple stock as illiquid.