Share turnover compares the volume of shares traded to the number of shares outstanding. If there is a high level of share turnover, this indicates that investors will have an easier time buying and selling their shares. To measure share turnover, divide the total number of shares traded during the measurement period by the average number of shares available for sale.
For example, if 10 million shares are sold in one year and the average number of shares available during that period were 1 million, then there is 10x share turnover.
This is a significant measurement for investors to be aware of, for a low share turnover rate indicates that it may take time to sell off a share holding, during which time the shares may decline in value. Consequently, many investors are unwilling to put their money at risk by acquiring the shares of a company that has a low rate of share turnover. A low turnover rate is relatively common for smaller businesses that have a small market capitalization.
A company can improve its share turnover by the following means:
- Listing on a stock exchange opens up additional investors who are constrained by their purchasing rules from purchasing unlisted shares. This also means companies should move up from smaller regional exchanges to larger ones, where the stock will be available to more investors.
- Encourage anyone holding large blocks of stock to sell off some of their holdings. Otherwise, only a small portion of the total number of shares issued will actually be available for sale.
- Encourage investors holding preferred stock to switch over to a single class of common stock. Only having one class of common stock makes more shares available to investors.
- Register as many shares as possible with the Securities and Exchange Commission. Otherwise, shares issued are not available for sale.
- Conduct a stock split to reduce the price per share, which makes it more affordable to investors.