Trading volume is a process of measuring the number of times shares are sold within a specified period of time. Generally, a turnover rate is calculated to cover a calendar year or a period of twelve consecutive months. The same formula can be used to evaluate shorter or longer time periods.
A turnover ratio is usually associated with the activity of a mutual fund account. The main idea is to determine the percentage of assets that are sold or delivered within the quoted period. While a certain turnover rate is to be expected with any group of mutual funds, investors generally look for funds that have a relatively low turnover rate.
The easiest way to understand a churn rate is to look at sales activity over a calendar year. On January 1 of a given year, a given mutual fund has a stock of 200 shares. Over the course of the year, 150 of these shares are sold and 150 different shares are bought. At the end of the year, the fund still contains the same number of shares and looks healthy on the surface. However, the turnover rate for the year is 75%.
When a mutual fund’s turnover rate appears to be a little high, investors do well to investigate the reasons why the turnover has not been lower. There are often legitimate reasons for selling activity in the background to be above an acceptable level. This could include changes in the economy or political situations that had a negative impact on the stocks that were sold. Therefore, it is inappropriate to assume that a high turnover rate automatically means that the fund is unstable or poorly managed.
As with many indicators, the calculation of a turnover ratio serves as a reference point for the investor. A reasonable turnover rate indicates a stable investment situation that is worth considering. At the same time, a mutual fund that has a high turnover rate for several consecutive periods should be thoroughly researched before an investment is made. While the reasons for high sales activity may be innocuous, an unusual amount of turnover may also indicate the presence of factors that would negatively impact the investor.