Monday, 7 May 2012

Stock trading still well below highs

Stock trading, as measured by the turnover ratio, is still well below record highs. The turnover ratio is the total value of shares traded during the period divided by the average market capitalization for the period. The steep drops in the turnover ratio are particularly evident for the United States (US) and the United Kingdom (UK). In 2010, the UKs turnover ratio stood at 101.9% a value not seen since 2003. The turnover ratio is still trending down.

A lower turnover ratio may be better for buy and hold investors since a lower turnover may reduce volatility. A lower turnover ratio is also a sign of less interest in stock markets.  There is some evidence, from the US and the UK, that seasoned older investors, after have being burned by the 2000s, are moving money out of equities and into fixed income. This demographic shift is of concern because as the baby boomers consolidate their wealth in less risky assets, lower turnover ratios may remain below their peak values for many years. Moreover, many younger investors are also wary of investing in equities and prefer to invest in bonds, even as bond yields sit at record lows. If these two trends continue, it may take a long time before we see a big increase in stock trading.

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