Turnover Rate Exposed: An Investor's Essential Guide to Interpreting Activity Levels

What Is Turnover Rate? Starting from the Basics

When it comes to the stock market, many people are accustomed to looking at price changes and percentages, but often overlook an equally important indicator——turnover rate. Simply put, the turnover rate is the frequency of stock trading within a specific period, directly reflecting the stock’s activity level.

The official definition is as follows: “Turnover rate,” also called “turnover ratio,” refers to the frequency of stock trading in the market over a certain period. Its value is the ratio of a stock’s total traded volume to its circulating shares, and it is one of the indicators reflecting the liquidity of the stock. In short, it helps investors identify how active a stock is.

For a concrete example: if a stock trades 10 million shares in a month, and the total share capital is 100 million shares, then the month’s turnover rate is 10%. In China, stocks are divided into publicly tradable shares on the secondary market and non-tradable state-owned and institutional shares. Usually, only the tradable portion is used to calculate the turnover rate to more accurately reflect liquidity.

Turnover Rate Calculation Formula

To accurately interpret the turnover rate, you need to understand this formula:

Turnover Rate = Trading Volume in a Period ÷ Total Issued Shares × 100%

In the Chinese market, the practical application is:

Turnover Rate = Trading Volume ÷ Circulating Shares × 100%

For example, if a stock has a circulating share of 20 million and trades 10 million shares in a month, its turnover rate is as high as 50%. In foreign markets, turnover is often calculated as the ratio of trading amount over a period to market capitalization at a certain point.

Turnover Rate Levels and Corresponding Stock Conditions

Different ranges of turnover rate correspond to different stock states. Investors can use these to gauge the main force’s intentions:

1%-3%: Dormant State
Institutions ignore it, retail funds dislike it. Usually large-cap stocks with big floats or traditional themes lacking attention.

3%-5%: Tentative Positioning
Some funds start testing positions, but market activity remains low with limited participation.

5%-7%: Divergence of Bull and Bear
Both sides begin to show disagreement; consecutive days with slight fluctuations in turnover rate; stock price slowly rises, possibly indicating slow accumulation by big funds.

7%-10%: Moderate Main Force Accumulation
Main funds show more active buying. If accompanied by a downward trend, it could be deliberate suppression or gentle shakeout, with relatively soft movements.

10%-15%: Main Force Control Initiates
Main players seek to control the stock, significantly increasing accumulation. Once completed, a rally often follows.

15%-20%: Active Trading and Volume Boosts
Trading activity increases, volatility intensifies. If the stock remains low with bottom volume, it might be a prelude to upward movement; but if volume surges at high levels with a decline, beware of distribution risks.

20%-30%: Intense Bull-Bear Battle
At low levels, it may indicate aggressive accumulation by main funds to attract retail traders. At high levels, it could signal distribution. Modern main players often break large orders into smaller ones to sell gradually, reducing friction costs and preventing retail investors from panicking.

30%-40%: Extremely High Turnover
Only stocks with exciting themes see such turnover. Main funds prefer stealthy accumulation since obvious signals can lead to price surges. Such turnover may indicate distribution or chip swapping.

40%-50%: High-Risk Zone
High attention, significant price fluctuations. These stocks are very risky; caution is advised.

50%-60%: Major Divergence
Potentially caused by significant news. When prices are high, profit-taking by early investors and new buyers looking for a pullback often occur.

60%-70%: Extreme Frenzy
Market sentiment is highly irrational; both buyers and sellers doubt each other. If at bottom, usually due to sudden major positive news; at top, extremely risky.

70%-80%: Out of Normal Range
Stock prices become highly uncertain. Falling prices at this level often have strong inertia, and subsequent volatility can be extreme.

80%-100%: Market Frenzy to the Extreme
Almost all chips are in motion. Such stocks should be observed from afar and only approached after the market calms down.

How to Use Turnover Rate to Identify Main Force?

The True Meaning of High Turnover at Low Prices

Investors should first distinguish the relative position of high turnover. If a stock has been depressed for a long period and suddenly shows high turnover, maintained over several trading days, it generally indicates significant new capital inflows. This makes the high turnover credible, as it involves volume at the bottom and thorough rotation, suggesting considerable upward potential and a higher chance of becoming a strong stock.

Characteristics of Main Force Operation in Medium to Long Term

Some stocks have very low turnover but prices keep rising. This indicates that medium to long-term institutional players are involved. Such stocks tend to have strong persistence and relatively low risk.

Warning Sign of High Turnover at High Prices

When stock prices have risen significantly and are far from the main force’s cost basis, high turnover becomes a signal of distribution. The market often refers to this as “massive volume at sky-high prices.” During an uptrend, sustained high turnover indicates continuous, even distribution; if turnover decreases at high levels, it suggests reduced capital in the final stage of the run, weakening upward momentum.

Practical Application: Key Points in Turnover Rate Interpretation

Focus on stocks with ample turnover and rising prices
This indicates main force has deeply entered. Since rising prices face selling pressure from profit-taking and stop-loss traders, more active and thorough turnover helps clear out sellers, raising the average cost of holders and easing upward resistance.

After sharp price increases, turnover rate drops
The stock moves with the market, often seen in growth stocks, indicating large holdings are locked in, and main forces are operating long-term. The stock is likely to continue climbing.

Rapid increase in turnover without significant price fluctuation
This is a phenomenon worth studying; it suggests a large number of chips are exchanged within a small range, often pre-arranged.

First-day turnover rate of new stocks
The higher, the better, since the stock is obtained through cash subscription, resulting in widespread distribution. Very high turnover on the first day indicates active accumulation.

Multiple consecutive high-level turnover days with substantial price gains
Possible scenarios include: the market maker raising the stock to build positions, short-term speculative funds playing, or old players distributing. Additional analysis is necessary.

Turnover just before a limit-up
In weak or consolidating markets, ideal conditions are: ordinary stocks with turnover below 2%, ST stocks below 1%. During strong markets, allowances can be made, but never exceeding 5%. These limits essentially control the amount of profit-taking and selling pressure, as smaller profit-taking and less selling pressure allow more room for upward movement the next day.

Relationship Between Turnover Rate and Stock Value

What does a higher turnover rate imply?

A higher turnover rate indicates more active trading, higher willingness to buy, and generally a hot stock. Conversely, a low turnover rate suggests less attention, a cold stock.

High turnover usually means good liquidity, easy entry and exit, and strong realization capacity. However, stocks with high turnover are often short-term trading targets, more speculative, with larger price swings and greater risks.

Predicting based on stock price trends

If a stock’s turnover rate suddenly spikes along with volume, it may mean heavy buying, with prices likely to rise. If a stock continues to rise and then turnover skyrockets again, profit-taking is probably happening, and prices may fall.

Generally, emerging markets have higher turnover rates than mature markets, due to faster expansion, more new listings, and less investment discipline, making trading more active.

The Logic Behind High Turnover

High-level volume distribution
When volume suddenly spikes at high prices, main players are very likely distributing. Such volume is hard to produce and usually requires positive news to facilitate the distribution process.

Strong stocks at the bottom
This is the most noteworthy scenario. High turnover at low levels indicates significant new capital entry, with larger upward space ahead. The more thorough the bottom distribution, the lighter the selling pressure during upward movement.

Specificity of new stocks
High turnover in newly listed stocks is natural. The myth of “undefeated new stocks” is fading; now, high opening lows and subsequent declines are common. Investors should be particularly cautious.

Practical Investment Advice

Overall, volume expansion upward at low prices is worth watching; volume expansion downward at high prices should be avoided. When optimistic about a stock, wait for stabilization before making a right-side entry. Be cautious when needed; do not go against the trend—respect the market.

Turnover rate is not an isolated indicator; it should be combined with P/E ratio, net profit, shareholder count, net asset per share, dividend payout, and other factors for a comprehensive assessment, ensuring a more accurate evaluation of the stock’s true value and investment opportunities.