Turnover ratio

How easy is it to buy or sell shares in a market on any given day? One number tries to answer that for the market as a whole.

Turnover is simply how much trading happened in a stock, or across the market, on a business day. It can be counted in rupees or in the number of trades done.

The turnover ratio turns that raw number into something comparable. It divides the rupee value traded by the market's total market capitalisation. A higher ratio means more of the market's total value changed hands that day. In other words, better liquidity.

This is a market-wide liquidity measure. It is a different idea from the Portfolio Turnover Ratio, which measures how often one mutual fund scheme buys and sells its own holdings, not how liquid the whole market is.

Market turnover is measured two ways: traded value in rupees, and traded volume in number of trades. Large-cap stocks usually show a high traded value.

The turnover ratio for the market as a whole is turnover in rupees divided by market capitalisation. The higher the liquidity in the market, the higher the turnover ratio will be, because more rupees of trading are happening relative to the market's total size.

This is a distinct concept from the Portfolio Turnover Ratio taught for mutual funds, which divides the lower of purchases or sales during a period by a scheme's average net assets, and measures how actively one fund's manager trades, not how liquid the market is. The two ratios share a similar-looking formula, a trading figure over a size figure, but answer different questions for different readers: this one for a market or exchange, that one for a single scheme.

Illustrative figures.

Suppose the total market capitalisation of all listed shares on an exchange is Rs 300 lakh crore, and on a given business day shares worth Rs 90,000 crore are traded.

Turnover ratio = 90,000 crore ÷ 3,00,00,000 crore = 0.03%

A rise in daily traded value to Rs 1,50,000 crore, with market capitalisation unchanged, lifts the ratio to 0.05% — the market has become more liquid, even though nothing about individual share prices has changed.

This is a different question from asking how often one equity mutual fund scheme, managing say Rs 5,000 crore, buys and sells within a year. That separate question is what the Portfolio Turnover Ratio answers, and it can be high or low regardless of what the overall market turnover ratio is doing.

Chapter 6 (Securities Market Segments), section 6.2.3(b) (Market Turnover), right after market capitalisation and its blue-chip/mid-cap/small-cap classification. Expect a question distinguishing this market-wide liquidity ratio from the Portfolio Turnover Ratio taught for mutual funds, or one asking what a rising turnover ratio implies about liquidity.

• This is not the Portfolio Turnover Ratio. That ratio measures how actively a single mutual fund scheme trades its own portfolio; this one measures liquidity across the whole market. They are computed differently and answer different questions, even though both are called a "turnover ratio".
• A higher turnover ratio means better liquidity, not more risk by itself — do not read a rising ratio as a warning sign on its own.
• Turnover can be measured in rupees or in number of trades — the ratio itself uses the rupee value, divided by market capitalisation.