By Arjun Chandrasekar.
Share turnovers in short, are a measure of the comparison between the volume of shares and the number of shares outstanding. For investors, analyzing a higher level of share turnover is great news as it signifies that shares of a company are easily buyable and sellable, meaning that even if a stock declines in value, they can get out of the hold right away, or if they want to get in a trending stock that’s rising in value, they can quickly do so. But on the flip side, if the share turnover measurement is lower, it indicates that it’s harder for investors to sell their shares because it takes a longer time to process. This can get especially worse when investors hold high-value shares that have low share turnovers during a value-declining period.
So now you might ask, how can I measure share turnover to be prepared for these situations? Well, here’s the simple formula: divide the total number of shares traded by the average number of shares available for that specific stock. For example, let’s say 5 million shares of a company XYZ are sold during 2020, and the average number of shares available for company XYZ is 2 million. According to the formula, when you divide 5 million by 2 million, we get a share turnover rate of 2.5x. As you can see, measuring the share turnover for companies is important before investing in it, and it’s one of the fundamentals of analyzing stocks.
But this single measurement shouldn’t be used to fully analyze the quality of a stock, as the number portrays the liquidity of the stock for a certain period of time rather than it’s overall liquidity. What you should use to analyze stocks for quality investments are primarily looking at it’s trends, P/E ratio, earnings per share, return on equity, and overall news plus analytical opinions.
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