Trading Turnover
Turnover scales trading volume by the number of shares available, giving a size-free measure of how actively a stock changes hands. The turnover ratio is trading volume divided by shares outstanding (or, more precisely, by the free float). A turnover of 0.5% a day means that, on average, one two-hundredth of all shares trade each day. Because it is normalised, turnover lets you compare a mega-cap with billions of shares against a small cap with a few million: raw volume would always favour the larger firm, but turnover puts them on equal footing. Higher turnover generally signals a more liquid, actively traded stock.
Try it yourself
Is this stock liquid? Read the spread and the Amihud ratio.
A tight spread is cheap to round-trip and a low Amihud ratio means a dollar of trading barely moves the price. Both point to a liquid name. The Amihud ratio is the one to watch: higher Amihud = more price impact per dollar = LESS liquid.
Why it matters
Raw volume is unfair to small companies, because a giant firm trades millions of shares simply by being huge. Turnover fixes this by asking, what fraction of the company changed hands today? A stock where 2% of all shares trade daily is far more active, relative to its size, than one where 0.1% does, even if the second has a larger absolute volume. It is the difference between asking how many people visited a city versus what share of its residents went out today. Turnover measures the intensity of trading, not its raw scale.
Formulas
Worked examples
Mega-cap M trades 10,000,000 shares a day out of 5,000,000,000 outstanding. Small-cap S trades 400,000 shares a day out of 20,000,000 outstanding. Which is more actively traded relative to its size?
Turnover of M = 10,000,000 / 5,000,000,000 = 0.20% per day. Turnover of S = 400,000 / 20,000,000 = 2.00% per day. Despite M’s far larger raw volume, S has ten times the turnover, so a much greater fraction of the company changes hands daily. Normalising by shares outstanding reverses the ranking that raw volume would have given and shows S is the more intensively traded stock relative to its size.
Common mistakes
- ✗Higher raw volume always means higher turnover. A large firm can post huge volume yet low turnover because it has so many shares; turnover divides volume by shares to remove the size effect.
- ✗Turnover is the same as trading volume. Turnover is volume normalised by shares outstanding (or float), so it is a fraction, not a count, and is comparable across firms of different sizes.
- ✗Total shares outstanding is the best denominator. Closely held or restricted shares rarely trade, so free float is often the better denominator for what is genuinely available to trade.
Revision bullets
- •Turnover = trading volume / shares outstanding (or float)
- •A size-free, normalised measure of trading activity
- •Lets you compare large caps and small caps fairly
- •Higher turnover generally signals greater liquidity
- •Free float is often a better denominator than total shares
Quick check
A stock trades 600,000 shares in a day and has 30,000,000 shares outstanding. Its daily turnover ratio is
Why is turnover often preferred to raw volume for comparing liquidity across firms?
Connected topics
Sources
- Datar, V. T., Naik, N. Y., & Radcliffe, R. "Liquidity and Stock Returns: An Alternative Test." Journal of Financial Markets, 1(2), 203–219, 1998.Uses the turnover ratio as a liquidity proxy and links it to expected returns.
- Jorion, FRM Handbook (2011)Jorion, P. Financial Risk Manager Handbook. 6th ed. GARP / Wiley, 2011.Presents turnover as a normalised volume-based liquidity measure.