Stock turnover ratio
A liquidity measure for a stock: the number of shares traded during a period divided by the number of free-float shares outstanding, usually taken over one year.
In plain language
A share is only as useful as an investor's ability to buy or sell it without moving its price. That ease of trading is liquidity, and not every listed stock has much of it.
The stock turnover ratio is one way to measure that liquidity. It compares how many shares actually changed hands to how many shares were actually available to trade.
How it works
The ratio divides the number of shares traded during a period by the number of outstanding free-float shares — shares held by everyone except the promoter group, since promoter shares rarely trade. The workbook sets the usual period at one year.
A ratio close to 1 means the free float effectively turned over once during the year, a highly liquid stock. A ratio well below 1 means most free-float shares never traded, a sign of a thin market where even a modest order can move the price.
The workbook pairs this with a second metric built the same way: the traded value turnover ratio, which divides the rupee value traded by the company's market capitalisation instead of dividing share counts. Both measure the same idea, how much of what could trade actually did, from two different angles.
The formula
Stock turnover ratio = Shares traded in the period ÷ Free-float shares outstanding
(usually measured over one year)
A worked example
Illustrative, built on the workbook's own formula. A mid-cap company has 12 crore free-float shares outstanding. Over the past year, 9 crore of its shares changed hands on the exchanges.
Stock turnover ratio = 9 crore ÷ 12 crore = 0.75
A ratio of 0.75 means three-quarters of the tradable shares turned over during the year, a reasonably liquid stock. A small-cap peer with only 40 lakh shares traded against 8 crore free-float shares would show a ratio of just 0.05, warning an analyst that a large buy or sell order in that stock could move its price sharply.
Why NISM asks about it
Chapter 12, section 12.12 (Measuring liquidity of equity shares), sets out the stock turnover ratio alongside the traded value turnover ratio as the two ways to gauge how liquid a stock actually is. Expect a question computing the ratio from shares traded and free-float figures, or one testing the free-float definition itself.
Common exam traps
- The denominator is free-float shares, not total shares outstanding. Using total shares understates the ratio and misreads how liquid the tradable portion actually is.
- Don't confuse it with the traded value turnover ratio, which divides rupee value traded by market capitalisation rather than share counts by free float.
- A high stock turnover ratio is not always good news — it can also reflect heavy short-term trading rather than genuine long-term investor interest.
Check yourself
1.How does the workbook calculate the stock turnover ratio used to measure the liquidity of a share?
- a)Traded value of the shares divided by the market capitalisation of the company
- b)Number of shares traded divided by total shares outstanding, including promoter holdings
- c)Number of shares traded during a period, usually one year, divided by the number of outstanding free float shares
- d)Number of shares held by promoters divided by the number of shares traded
Show the answer
Answer: (c) Number of shares traded during a period, usually one year, divided by the number of outstanding free float shares
The workbook gives two liquidity metrics.
Stock turnover ratio: "calculated by dividing the number of shares traded during a given period by the number of outstanding free float shares. Mostly, the time frame used is one year. Free float share refers to number of shares held by non-promoter group shareholders."
Traded value turnover ratio: "calculated by dividing the traded value of the shares by the market capitalisation of the company."
Why the others are wrong:
- Option A is the traded value turnover ratio, the second metric. It divides a value by a value. The stock turnover ratio divides a number of shares by a number of shares.
- Option B uses the wrong denominator. Promoter shares are rarely traded, so including them would understate how actively the tradeable shares change hands.
- Option D is built on promoter holdings and does not measure trading activity.
The background idea: "One of the main objectives of stock exchanges is to provide liquidity i.e., the ease of buying and selling. However, not all shares are liquid. Liquidity can be achieved when there are large number of buyers and sellers for a given stock."
Where this is taught
Free preparation for NISM Series XVRelated terms
- Free floatThe part of a company's shares readily available for trading — broadly, what is not locked up with promoters. Indices, position limits and MWPL are all measured on it.
- Inventory dataThe quantity of a commodity held in storage at a given time — in warehouses, on exchanges or in government reserves — read as a direct signal of oversupply or scarcity.