Understanding Low Float Stocks

What Are Low Float Stocks?

Low float stocks refer to the securities that remain after a company’s stock has been issued to its controlling investors — meaning there are relatively few for the public to buy.

Investors typically consider a float of 10-to-20 million shares as a low float, but there are companies with floats of less than one million. Some larger corporations have very high floats in the billions, and you can find even lower-float stock trading on over-the-counter exchanges.

Companies with a low float frequently have a large portion of their equity held by controlling investors such as directors and employees, which leaves only a tiny percentage of the stock available for public trading. That limited supply can cause dramatic price swings if demand changes quickly.

Because low float stocks have fewer shares available, investors may have difficulty finding a buyer or seller for them. This may make the stocks more volatile, which appeals to day traders. The bid/ask spread of low float stocks tends to be high as well.

Let’s explore low float stocks in more detail, some ways to find and trade them, and some risks and benefits to these types of trades.

Stock Float: Quick Recap

The float of a stock measures the number of shares of a particular stock. It indicates the number of shares of stock available for trading. The measure doesn’t include closely-held shares, those owned by controlling investors or company owners.

Calculating floating stock requires looking at a company’s balance sheet and taking the total number of shares of a company and subtracting any restricted and closely-held shares. Stock indexes, such as the S&P 500, often use floating stock as the basis for figuring out the market cap (the total value of outstanding shares in dollars) of a company.

Benefits of Trading Low Float Stocks

Essentially, low float stocks primarily benefit day traders who are interested in earning large profits in a short time.

By their nature, low float stocks are volatile. There are relatively few low float stocks in the marketplace, and their prices tend to go up and down easily and quickly. Moreover, every trade of a low float stock issue can have a larger impact on the value of the stock than it would on a security with a higher float. For example, when good news hits a security with a limited supply, it doesn’t take much for it to have a huge impact on the market. A low float stock can make gigantic gains when demand skyrockets. Conversely, if bad news comes to the same security, its price can nosedive rapidly.

The dramatic volatility in investing in low-float companies, can lead to a greater level of risk. But an experienced and highly skilled day trader might be delighted to take on this volatility challenge in exchange for potential continuous gains in a short trading session.

Importance of Low Float Stocks

If you’re interested in investing in a particular company, it’s important to understand its stock float. It’s critical that you don’t overlook this detail while performing your due diligence on an issuing company.

The size of a stock float can change over time, which would affect the stock’s liquidity and volatility. Stock buybacks, secondary share offerings, insider buying or selling shares, and stock splits (or reverse splits) can cause the number of shares outstanding to change, and thus the float.

6 Reasons for Low Floating Shares

Low float stocks tend to have greater spreads and higher volatility than a comparable larger float stock. And, you may find it hard to enter or exit positions in stocks that have a low float. If it seems that your favorite company has a limited amount of shares available in the market, it could be that it’s issuing low floating stocks.

Let’s take a closer look at some specific instances that could account for low floating shares.

1. Special Purpose Acquisition Companies (SPACs)

Shares of stock may be low floating because the company that’s issuing the shares is part of a special purpose acquisition company (SPAC). As a refresher, a SPAC is a corporation formed for the sole purpose of raising investment capital through an initial public offering (IPO).

Typically, experienced business executives in the same industry as the SPAC’s target acquisition become the founders of a SPAC. A SPAC could take as long as a number of years to complete. And, even when the new company does go public, the shares available for public purchase may be few because they’re held by founders of the SPAC or other officers and insiders close to the deal.

2. Family Operated

Another reason for low float shares could be if the company is family owned. In fact, family owned or operated businesses are all around us — including well-known names like BMW, Samsung, and Wal-Mart Stores. One-third of all companies in the S&P 500 index and 40 percent of the 250 largest companies in France and Germany are defined as family businesses.

In these cases, a family likely would own a significant share of the company’s shares and can influence important decisions, like electing a chairman and CEO. So, in particular, if a family operated company is small to midsized, there may be few shares left for the public to buy.

3. Charitable Foundations

Donating to charitable foundations and trusts is popular with individuals and corporations alike. Appreciated shares of stock offers value, especially when it comes to capital gains taxes. If you donate a security with an unrealized capital gain, you won’t have to pay that capital gains tax after the sale. Neither would the charity if it sells the shares immediately. In addition, the donation is fully tax-deductible as cash would be for those who itemize on their tax return.

Of course, the benefits are different for corporations, and especially for public companies. Tax laws can be complicated. However, there are a number of benefits that, in general, could be applicable across the board.

One of the most immediate benefits to a business from supporting a charity is being able to get a charitable-donation tax deduction. Depending on a firm’s financials and other factors, giving money to charities can be complicated and a company would need to meet all the IRS’s requirements to achieve this benefit. Other benefits to donating can include attracting the kind of talent a company wants, getting free publicity, and gaining customer support.

So, if you are particularly keen on buying into a particular company, and that firm has a strong corporate social responsibility program, you could find that it shares are low floating.

4. Stock Buybacks

If a company buys back some of its shares, it affects its float by reducing the number of shares available for trading; there’s even a name for it: float shrink.

Regular share buybacks, along with dividend payments, are two ways that a company may reward shareholders. Another reason for a share buyback could be for a company to gain better control of its strategic initiatives without needing to consult its shareholders.

5. Initial Public Offerings (IPOs)

In another scenario, a company might be involved in an initial public offering (IPO), which, if this is the case, would mean that there are zero shares yet in which the public can invest. An IPO could take between 90 and 180 days to wrap.

6. Stock-Based Compensation

Some companies have initiatives that reward their employees with company stock; either as part of an incentive program or combined with their regular pay. A company also could have an equity compensation program in place as a way of rewarding employees, executives, and directors of a company with equity in the business.

Understanding Shares Outstanding

Another stock market term that helps explain low float stocks is shares outstanding. Shares outstanding refers to the total number of shares issued by a company, including those that can’t be traded.

The float is the number of shares out of the shares outstanding that are available for public trade. This is known as the float percentage. Companies might have numerous shares outstanding, but only a tiny percentage of floating stock.

The amount of floating stock a company has changes over time, as companies might sell more stock to raise money, or company stakeholders might sell their holdings. If a stock goes through a split or reverse split, this will also increase or decrease floating shares.

Differences Between Low Float Stocks and Shares Outstanding

Float and shares outstanding are two ways to measure shares of a stock.

Floating stock is measured by taking the total shares outstanding and subtracting closely held shares. Closely-held shares are those held by insiders and investors like officers, directors, employees, and sometimes family. The float also shows how many shares are available on the market for the public to purchase.

Whereas, shares outstanding is the total number of shares issued, including those actively held by general stockholders (outside investors) and insiders.

Floating Stock Example Calculation

If a trader looks at a company’s balance sheet, they can see how many outstanding shares the company has under the heading “Capital Stock.”

Looking at Amazon (AMZN), the company’s balance sheet shows outstanding shares and floating stock shares. In May 2021, Amazon had:

•   504.32 million shares outstanding

•   452.17 million float shares

In the case of Amazon, this is a high float stock, with 89.66% of the stock available for trade.

To show an example of a low float stock, let’s look at the company JW Mays Inc. (MAYS), which is listed on the Nasdaq exchange. The company has 2.02 million shares outstanding, and 473.25 thousand float shares.

This is a 23.43% float percentage, and could serve as a signal for day traders to look at other factors to determine whether they want to invest in the stock.

Evaluating Low Float Stocks

Not every low-float stock represents a good buy, but it is a popular strategy for day traders. To evaluate a low-float stock, day traders often look at several other factors.

High Relative Volume

The relative volume shows a stock’s current volume in comparison to earlier periods in a company’s history. This is important to investors because it can affect a stock’s liquidity. If a stock has low liquidity, traders can potentially get stuck with shares they can’t sell.

They may also find themselves unable to take advantage of news catalysts with a significant buy or sell the move. If a stock’s price changes, but there isn’t a lot of trading volume, it may not be a good pick.

News Catalysts

Positive or negative news about a company frequently makes a low float stock increase or decrease in a short amount of time.

Day traders keep a close eye on the stock market and corporate news to see which stocks likely would make moves. A news event can cause a low float stock to move anywhere from 50% to 200% in a single day, as they are in low supply.

Float Percentage

This is the percentage of the total shares of stock available for trading. Each trader has their preferences, but most look for a percentage between 10% and 25%.

How to Trade Low Float Stocks

When trading a low float stock, a trader might buy and sell the same stock multiple times in a single day. Then, move on to a different low float stock the next day in an extreme form of market timing. Many traders will plan out their profit targets and support and resistance ahead of time and stop losses to reduce risk. As with any trade, traders can look at technical indicators like candlestick charts and moving averages to see whether a stock looks bullish or bearish.

A good strategy pays attention to technical analysis and rather than simply buying or selling based on rumors or news.

Finding Low Float Stocks

Finding and evaluating stocks to trade requires some knowledge and experience. Several platforms offer the ability to trade low float stocks. Some of these platforms allow traders to filter by criteria such as volume and float to find the best opportunities. Traders can look for stocks with a float of less than 50 million and a relatively high volume.

Penny stocks less than $5 are very popular with day traders. Traders can also look to watchlists for ideas about which low float stocks to trade. Two popular watchlists are:

•   Reuters’ Free Scanner: Free to register. Users can find low float stocks by scanning with the filter “float.”

•   Trade Ideas: This site has multiple low float stocks lists for the U.S. market. It highlights stocks that are moving so that traders can capitalize on opportunities.

•   Stock Screeners: There are many other stock-screening tools you can use to find low float stocks — such as Benzinga Pro , which lets you “search and filter stocks by any attribute.”

Some Risks to Know

Every investment comes with risks, but low float stocks present some particular challenges. Day trading is inherently very risky and can result in significant losses (as well as gains). So, other types of investments are often a better fit for those with a low appetite for risk.

Low float stocks can have high volatility; their price can change within seconds or minutes. If an investor isn’t careful, knowledgeable, or always on top of it, this volatility could wipe out a large portion of their portfolio. Low float stocks could also present substantial profit opportunities; traders might see gains of 50% to 200% in a single day.

Looking at both the news and technical indicators is crucial for trading success. Trading low float stocks requires a daily look at market news, as the stocks that look like a promising trade one day may not be ideal the next.

The Takeaway

The term “low float,” as it pertains to stocks, refers to the amount of shares available to trade in the public market after the appropriate number of shares are allocated to founders, officers of the company, and other inside investors.

It’s important for investors to be aware of the amount of a company’s low-floating stock, as it can reflect the stock’s liquidity. If a stock has relatively few available issues, it might be harder for traders to sell it. Trading floor activity is often fast and furious — requiring great skill to weave in and out of trades, and to make the right decision quickly. As such, low float stocks primarily benefit experienced day traders.

Nonetheless, float is a concept that can benefit all investors, as it’s a key consideration when investing in any company.

If you’re interested in a more long-term approach to investing, there are many ways to get started, including opening a brokerage account on the SoFi Invest investment app, which lets you hand-select each stock you want to buy or sell. If you’re just getting started, SoFi has a team of professional financial planners available to answer all your questions and help you achieve your goals.

FAQ

What is the meaning of low float stocks?

Low float stocks are those shares that are available for the public to purchase once a company’s shares have been distributed to insiders, family, management, and the like.

How can you find low float stocks?

One way to find low float stocks is to look at the total number of shares that are available for the public to buy. You can find this number by taking a company’s total number of shares, and subtracting the number of shares already held by company insiders; the number you’re left with is the float.

But if you don’t have this data, or want to browse for other low float stocks, there are many stock screening tools that can provide the float data for you.

What are the benefits of investing in low float stocks?

Low float stocks can garner huge profits for day traders when a particular industry, sector, or company is in high demand.

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Photo credit: iStock/damircudic

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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