Friday, December 30, 2016

The Concept of Share Volume and Share Turnover [With Example]

Share volume and share turnover are important measures of liquidity in the stock markets. Let us attempt to understand the meaning of the two in some detail.

Share Volume: Share volume is a measure of the total number of shares traded over a period of time. To compute the daily volume in respect of a particular stock, one simply needs to add the total number of executed orders (in terms of quantity) for the given stock during the day. The more the volume, the more liquid is the stock. 

Note that for an order to be executed, there must be both a buyer and a seller. Thus if S sells 100 shares of Sun Pharma to T, the volume would increase by 100 and not 200 as S selling to T & T buying from S would comprise the two sides (buy & sell) of the same transaction. 

Let is understand the meaning of share volume with the help of a few examples. 

Example 1: A sells 1000 shares of Company FM. Of these 500 are bought by B and the remaining 500 by C. In this case the share volume is 1000. 

Example 2: A sells 1000 shares of Company FM. The are bought by B. In a separate transaction, C sells 100 shares of FM and these are also bought by B. The volume in this case is 1100 shares. 

Example 3: A sells 1000 shares of Company FM to B. Similarly C sells 100 shares to B. Towards the end of the day A buys back 500 shares from B. The total volume in this case is 1000 + 100 + 500 = 1600 shares.   

Share Turnover: Share turnover (for a particular stock) is the ratio between the total number of shares traded over a period of time and the average number of shares outstanding during this period. We apply the concept of free float while computing the number of outstanding shares. The higher the share turnover ratio, the more liquid the stock.

Liquid stocks give investors more opportunity to enter into or exit from their trades at any given price point.

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