When trading or investing in stocks, it’s essential to do your homework before making any decisions. One key piece of information you’ll want to pay close attention to is the stock float and how its size can affect the risk involved with investing. So, keep reading as we look at what is float in stocks, why it matters to investors, and how it can determine the type of returns, you can expect.
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Float in stocks definition
Calculating floating stock requires you to subtract the number of closely held and restricted shares from the number of outstanding shares. Restricted stocks are ones that are not available for trading for a certain period because they are in a lock-up period following an initial public offering (IPO). Closely-held shares, on the other hand, can be ones owned by company insiders, major shareholders, or employees.
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Floating stock example calculation
As noted above, the number of outstanding shares does not always represent the floating stock amount. A company’s float is calculated by subtracting closely-held (shares owned by institutions, management, and ESPOs) and restricted shares from outstanding shares.
Floating stock formula
Where:
- Outstanding shares are the total shares issued by a company;
- Shares owned by institutions are those held by large entities like mutual funds or hedge funds;
- Restricted shares are shares held by company insiders or under legal restrictions;
- ESOP are employee stock ownership plans.
For example, a company may have 10 million outstanding shares. However, out of the 10 million shares, 5 million are owned by some large institutions, management owns 1 million shares, and 500,000 shares are contributed to ESPO (employee stock ownership plan).
Therefore, the floating stock is 3.5 million (10 million – 5 million – 1 million – 0.5 million). As a percentage of outstanding stock, the floating stock will be 35 % (3.5 million divided by 10 million = 0,35 multiplied by 100).
Low vs. high float stock
Since the float is the number of shares available for public trading, it is prone to fluctuations over time and is influenced by various conditions. Generally classified as high and low, knowing the size of the float will illuminate the stock’s volatility and liquidity.
High float stock
A stock float is considered high if it has a large number of shares available for trading, normally with more than 15 million shares within its float. A high float is often seen in larger companies.
Due to many shares in the float, its liquidity can absorb any big moves. The lack of scarcity means that the value is often balanced with the number of shares being traded. Since it takes more effort to move the price, stocks with a high float tend to be more predictable and less volatile.
As steady and predictable, high float stocks are preferred by investors looking for stable and long-term growth without an increased risk of significant single-session losses.
Pros and cons of high float for investors
Pros
- Most stocks in the high float category are large companies with a high number of shares to make the price per share affordable for the average investor. In addition, many of these companies are titans in their industry with a long history of dominance within their respective markets. Investing in a successful long-standing company is, of course, a much safer bet;
- Great for investors looking for stable and steady growth;
- Insiders will rarely own more than 50% of a high-float stock, meaning that important shareholder votes at companies with high-float stocks usually follow along the lines of what the investment community wants to see, as they hold the majority of the company’s shares.
Cons
- Due to the calm nature of high float stocks, there is less potential for momentous short-term gains;
- Low insider ownership can also be seen as a drawback. If company insiders don’t want to put their money in the game, it is worth considering whether you should. Therefore, when investing in high float stocks, be sure to look for well-established companies;
- As high float companies have at least 15 million shares available on the open market, to have any real voting power as a singular investor you would have to own a weighty portion of that multi-million float.
Low float stock
As the name suggests, low float stock indicates that the number of shares available for public trade is low, usually with lower than 10 million freely available shares. This can be the outcome of having a substantial number of closely held or restricted shares or having few investors. For such stocks, the daily average volume tends to be low, leading to volatility and, as a result, wide bid and ask prices.
Before the company dilutes its value by throwing more shares into the market, the lower float, in the beginning, can cause the share price to skyrocket as long as demand is there. For such low float stocks, a relentless rally creates demand. In other words, investors are stumbling over themselves to buy shares when they are scarce, remarkably driving the price higher.
Because of the large swings in value, low float stocks tend to appeal to day traders. They can be highly lucrative short-term but also truly headache-inducing due to their extraordinarily volatile and fast-moving character.
Pros and cons of low float for investors
Pros
- Due to the highly volatile nature of low float stocks, there is ample opportunity to see dramatic short-term gains;
- Though not always the case, low float stocks have low floats because insiders have purchased a large percentage of outstanding shares. High-level insider ownership indicates that the company management has high trust that the company is moving in the right direction;
- Low float stocks have a limited supply of shares available. Therefore, even the tiniest bit of news can trigger an increase in demand leading to dramatic growth in stock price.
Cons
- High levels of volatility can also express as a major disadvantage. Just as it presents an opportunity for extraordinary gains, the losses can be just as significant. A definite no-go for a risk-averse investor;
- Low float stocks tend to represent lesser-known companies. While there exists a possibility that here lies the next Apple (NASDAQ: AAPL), often, these businesses present more questions than answers, making it essential that you put additional research into your decision-making process;
- Sometimes low float stocks in high demand will skyrocket. However, a more likely scenario is that these lesser-known stocks may not have much demand at all, making the acquired stocks much more difficult to sell.
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Evaluating low float stocks
A few things worth looking at when considering investing in low float stocks:
- Relative volume (RVOL): The relative volume shows the company stock’s current trading volume compared to previous volumes. This indicator is critical for investors because it can affect the stock’s liquidity. Low liquidity means investors potentially get stuck with shares they cannot sell.
- News catalysts: Positive or negative news can have an immense impact on a low float stock value. Keep an eye on the stock market and corporate news to predict which stocks are likely to make moves. A news event can cause a low float stock to shift anywhere between 50% to 200% in a single day since they are in short supply.
- Float percentage: This is the percentage of total shares available for trading. Every trader has their specific preference, but most look for a rate between 10 and 25%. Worth considering: how small the float is and for how long, the reasons for it being low, and whether there was a reverse stock split (merging stock to form a smaller number of proportionally valuable stock).
Float vs. authorized shares vs. shares outstanding: key differences
A company’s stock can be arranged into three different classifications, depending on its status:
- Outstanding shares are the total number of shares a company has issued. This includes any closely held and restricted shares and those available for public trading.
- Authorized shares are the maximum amount of shares a company is legally allowed to issue. It includes any shares that have already been published, as well as shares that have management’s approval but have not yet been released into the trading market. The authorized share count is laid out when the company is created.
- The float indicates how many shares are available for the general investing public for trade. It excludes any restricted or closely held shares.
In conclusion
To sum up, a stock float is the total number of shares available for the investing public to buy and sell. The company float is an excellent measure of potential risk and reward, as well as ownership structure – all of which are of great importance to an investor.
Keep in mind that floats have an inverse relationship with risk, with high-float stocks being less risky than low-float stocks. Therefore, it is vital to figure out what you’re looking for as an investor; is it stable growth and long-term gains, or momentum with potential significant short-term returns.
Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.
FAQs about float in stocks
How to calculate the float?
The float in stocks is calculated by deducting the company’s restricted and closely-held shares from its outstanding shares.
What is a low float stock?
When a company has a low percentage of shares available for public trade, it is considered to have a low float stock. The low supply of shares leads to higher volatility and thus wide bid and ask prices.
Why trade in low float stocks?
The high volatility of low float stocks makes them more adept at performing well short term. So if you’re comfortable with high levels of stress and have done your research, low float stocks can surprise you with impressive short-term gains.
What is a high float stock?
When a company has a high percentage of shares available for public trade, it is considered to have a high float stock. Higher supply in stock leads to more stable movements in share price, making high float stocks a reasonably low-risk investment.
Why should you consider high float stocks?
The stability and predictability of high float stocks make them a good option for long-term gains. So if you’re a risk-averse investor looking to invest in stocks that will grow over time, high float stocks can present a lucrative long-term investment strategy.
What is a free float stock?
Free float in the stock market refers to the number of shares of a company that are publicly available for trading. These shares are not held by insiders or major shareholders (like company executives, governments, or other corporations) who hold their shares for the long term
What is public float stock?
A public float is the same as free float and refers to the number of a company’s shares that are publicly owned and available for trading by general investors.
What is a short float stock?
A short float stock represents the proportion of a company’s available shares that are currently sold short. It’s calculated by dividing the number of shorted shares by the total number of shares available for trading, indicating investor sentiment and potential stock volatility.
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