What should you know about the turnover rate in stock trading?

What should you know about the turnover rate in stock trading?

What is meant by stock trading?

You can find a company labeled as a public company. It means that the company is raising capital by issuing its shares to the public. You can buy shares of any public company and become a shareholder of that institution. The process of buying and selling shares of a company in the stock market is known as stock trading. The stocks will be available in both public and private share markets. The shares of private companies will be traded privately through equity crowdfunding programs. You can do stock trading through stock brokerages and electronic trading platforms. It is necessary to have an investment strategy in mind to succeed with investing. The trading securities can be anything like stocks, bonds, and others. The stock exchange is each place where traders and brokers buy and sell these stocks. Every country will have its stock exchange for trading. Before entering the stock market, you should know some of the strategies and terms that define the happenings in a stock exchange. One such factor is the turnover rate. In this article, let us know something about the turnover rate in stock trading.

What is the turnover rate? 

The turnover rate is the indicator of the frequency of certain stocks changing the hands over some time. Every exchange will provide a percentage value based on various sample populations. You can calculate turnover rates based on all the stocks listed in the exchange, or that of a single Stock, or a combination of stocks held by a single institution. It will be a measure in percentage. If the turnover rate is high, it means that more people are trading the shares actively. When the frequency of trading is low for a stock, the turnover rate will be less. Investors will use the turnover rate as an indicator to predict the rise or fall of stock prices. 

The formula to calculate the turnover rate is as below,

Turnover rate = (Volume in a period/Total numbers of issued shares) x 100%

Characteristics of Turnover rate

The willingness of people – If the turnover rate of a particular stock is high, it means that people are actively buying and selling the stock. So, you can conclude that the willingness of people to buy and sell the stock is high. It will be low when the Stock is unpopular and with a low turnover rate. 

Liquidity of stock – Higher turnover rate indicates that the share is with better liquidity in the market. Stocks with high turnover rates will be of high risk since they will be the target of short-term fund chasers. 
Predictability – If the turnover rate of a stock increases suddenly, it means that the investors are buying in large quantities. This scenario can predict that the price is going to rise. A gradual increase in turnover rate for a longer period will indicate the fall of price as many people will cash out. 

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