Here is an article from The Blanket...re the TRO...(turnover Ratio)..
Some may find interesting...
TURNOVER - The Blanket, 12-Feb-1999
Have you ever wondered how a stock can soar on little to no news? Or
how a stock gets so "hot" that it seems it won't ever quit moving up?
As a continuation of last week's discussion on VOLUME, I am going to
take it a step further and look at the role of supply and demand in the
stock market. More specifically, I am going to introduce you to a
very useful ratio for comparing the supply and demand - it is called the
TURNOVER RATIO or TRO.
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The markets are driven by supply and demand. What really makes a stock
price rise is more buying than selling. Of course there are those that
argue that there are equal numbers of buyers and sellers (which isn't
really true - remember I tried to sell a stock and it took two days to
do so because there wasn't a buyer?) On the flip side, if a sudden rush
of people want to buy a stock, for whatever reason, you have more buyers
than sellers. How do you induce someone to sell? By offering a higher
price. Therefore, in order for the price of a stock to rise, more
people have to want to buy than sell.
So how can one go about comparing the supply vs. the demand of a
particular stock? First lets define the elements needed to come up with
this comparison.
In researching any stock you will often find various share-related
items, one of which will be FLOAT. You can get the information from a
number of sites, but I will refer you to one in particular in this
article.
Go to Yahoo! Finance at quote.yahoo.com and input a stock symbol
to retrieve a quote. After receiving the quote click on "Profile"
(under More Info). The following link is the profile for Sun
Microsystems (SUNW): biz.yahoo.com
Scroll down to "Statistics at a Glance." Below that you will find
"Share Related Items" and "Float." I will focus on FLOAT as it
represents the number of shares outstanding (or all the shares there are
for that company) minus what is owned by insiders (people in the
company, like the CEO, COO, CFO, President, Vice Presidents, etc.) and
what the company is holding back (treasury stock.) In a nutshell,
associate the FLOAT with the supply of shares available to be traded at
any given time by you and me.
On whatever research site we choose we will find the stock's AVERAGE
VOLUME. At the Yahoo site, it is in "Statistics at a Glance" under
"Price and Volume." Some sites provide the average monthly volume
straight up (Wall Street City, but they make you figure out the Float by
hand,) but with Yahoo, MarketGuide, and some others, you will need to
calculate the average monthly volume by multiplying the daily average by
22 (average trading days per month.)
Now having defined the elements, the turnover ratio is the relationship
between the float and the average monthly volume. Consider the
following:
If the float is very large relative to the average volume (lots of
shares out there to be bought and sold in relationship to the average
volume) we would see a low turnover rate and thus an onrush of buyers
would not move the price much. However, if the float is low relative to
the average volume (a lot of people wanting very few available shares) a
sudden rush of buyers could move the price of a stock dramatically.
OK lets take a look at a couple of examples. The first one is General
Electric (GE) which is a widely held stock.
>From the link below I obtained the following information:
biz.yahoo.com (data as of 2/11/99)
Average Daily Volume (Mil) 4.27
FLOAT (Mil) 3,200.00
To convert the average daily volume to the monthly number we need,
multiply it by 22 trading days. This gives us:
AVERAGE MONTHLY VOLUME (Mil) 93.94
TURNOVER = 93.94 / 3200.00 = 2.9%
What significance is this? It means that only 2.9% of the total
outstanding shares owned by investors were traded in one month.
One could argue whether there is not much demand or whether there is
just too much supply available.
Now lets take a look at another example - Yahoo!
>From the link below I obtained the following information:
biz.yahoo.com (data as of 2/11/99)
Average Daily Volume (Mil) 13.60
FLOAT (Mil) 79.00
AVERAGE MONTHLY VOLUME (Mil) 299.20
TURNOVER = 299.20 / 79.00 = 379%
Note - TURNOVER will tend to be overstated on a NASDAQ stock like Yahoo!
as the shares are bought and sold first to an intermediary - the market
maker, who holds an inventory of the stock. To come up with a minimum
TURNOVER RATE, divide the 379% in half (since half of the trades were to
the market makers, who really don't count for the TRO) and you come up
with 189%!
Wow, what a difference! Each share of Yahoo! has traded 1.89-3.79 times
over the past month. And the price swings are phenomenal. Click the
links below and compare the charts on GE and YHOO.
**Note** from time to time the following links may show up blank or give
you an error message indicating that the server is busy. If so, try
again at a later time. We are sort of sending you in the "back door"
and the server doesn't always respond well to that. If you like, you
can go directly to the front door of iqc.com and get charts
for the companies indicated.
iqc.com (GE)
iqc.com (YHOO)
Focus on the activity between January and February time period. Note
the length of the bars on any given day (daily high-low range) and how
drastic the price changes in YHOO compared to GE. As you can see the
higher the TURNOVER, the more volatile the stock and the greater
potential for larger swings in price (both up and down!).
Not a believer yet? Take the time and calculate the Turnover ratio for
Walmart (WMT) and CNET, Inc. (CNET) and then study their charts focusing
on daily swings in price. The difference is simply amazing!
HINT - the turnover ratios should come out to WMT=5.2% and CNET=216%
If you are way off it could be you are interpreting the average volume
or float wrong. Note that "B" is for billion, "M" is for million and
"K" is for thousand . . . it can make a lot of difference in your
calculations!
As a final point in wrapping up today's discussion, TURNOVER shouldn't
be used to make a decision on whether to invest in any particular
stock. Rather, it should be used to quantify the relative supply and
demand and how much risk/reward there may be as a result of a change in
trading volume, market conditions or significant news.
Until next time, have a wonderful week!
Dot Gremillion
The Blanket
thesecurityblanket.com
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