Understanding Low Float Stocks

By Ashley Kilroy · July 27, 2021 · 5 minute read

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Understanding Low Float Stocks

Low float stocks are a popular type of investment for day traders since they may allow them to earn continuous profits throughout a single trading session. Let’s explore what low float stocks are, some ways to find and trade them, and some of the risks and benefits to these types of trades.

What Is Float in Stocks?

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 SP 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.

What Are Low Float Stocks?

Low float stocks have a small number of shares available for trading.

Investors typically consider a float of 10-20 million shares as a low float, but there are companies with floats below 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 often have a large portion of their equity held by controlling investors such as directors and employees, leaving only a tiny percentage of the stock available for public trading. That limited supply can cause dramatic price swings if demand changes quickly.

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

Understanding Shares Outstanding

Another stock market term that helps explain low float stocks is shares outstanding. Shares outstanding are 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 a large number of 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.

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 473.25k float shares.

This is a 23.43% float percentage, and could represent 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 time frames.

This is important to investors because it can impact 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 often 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 are likely to make moves. A news event can cause a low-float stock to move anywhere from 50% up to 200% in a single day since 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 for float percentage, but most look for a percentage between 10 – 25%.

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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 technicals like candlesticks 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.

Recommended: A Guide to High-Risk Stocks

Finding Opportunities

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 low float stocks with a float under 50 million and a relatively high volume.

Penny stocks under $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 US market. It highlights stocks that are moving so that traders can capitalize on opportunities.

Some Risks to Know

Every investment comes with risks, but low float stocks present some particular challenges for traders.

Low float stocks have high volatility and can dramatically change the price 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. That said, low float stocks also may have substantial profit opportunities. Traders may 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, since the stocks good for trading one day may not be ideal the next.

The Takeaway

While low float stocks may make sense for traders, they may hold less appeal for long-term investors. Day trading is inherently very risky and can result in significant losses, so other types of investment are often a better fit for those with a low appetite for risk.

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.

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