When most people think about stocks, a quintessential image comes to mind: a ringing bell, followed by harried suits shouting on the floor of The New York Stock Exchange. But for some, associations with the stock market are more personal, with higher stakes. For those people, stock market know-how is key.
Whether you’re a veteran or a rookie when it comes to the stock market, you likely have come across the term “stock float.” And regardless of your experience, the question, “What does stock float mean in stocks?” may have you stumped.
Finding out the answer can play a major role in your investing future.
Stock Float: The Basics
Some companies have large numbers of shares of stock available to buy and sell—sometimes numbering in the millions and billions.
Floating stock is the number of shares available for trade of a particular stock. The number of floating shares is referred to as the stock float or just the float.
To calculate the amount of floating stock available, subtract the number of locked-in shares and restricted stock from a firm’s total outstanding shares.
There are a number of reasons a company may have locked-in or restricted shares. One such scenario would be a company that has shares owned by certain investors and employees of that business that aren’t available for trade.
Sometimes, these shares are referred to as “closely held” shares. For example, shares may be given to an executive as part of a compensation package but are not currently available to be traded on the market. Or, shares may be part of a general Employee Stock Purchase Plan .
Restricted stock generally refers to shares that cannot be traded without special exception from the Securities and Exchange Commission. One such example of this is stocks that are restricted by the SEC from sale during a lock-up period after an initial public offering, where certain shareholders (such as employees and major investors) are not allowed to sell their stock for that given period. This may be done in an attempt to stabilize the price of the stock.
No matter the reason, if there are shares that are not available for trade in the market, then they will not be tallied in the final float count.
How to Determine the Float of a Stock
The stock float calculation is relatively simple. A float is calculated by subtracting a company’s restricted and closely-held shares from their outstanding shares. If a company has 100 million outstanding shares, with 15 million of them locked in, this company’s float would be 85 million.
Again, this means that 85 million shares of this company’s stock are available for trade on what is referred to as the open market or the market exchange. These are the shares that you could hypothetically purchase with a broker, brokerage account, or other trading platforms that have access to the major stock exchanges.
Using this same example from above, it’s relatively easy to calculate the float stock ratio . Divide the 85 million floating shares by the 100 outstanding shares, resulting in 85 percent. This is the percentage of shares of this company that are available for trade.
You can often find a company’s float on one of many websites that aggregate information on publicly traded stocks, such as Marketwatch , Yahoo Finance , and Finviz ©. Each website is a little different, but poking around under categories labeled “overview,” “statistics,” or “key information” will likely lead you in the right direction.
What Is a Low Stock Float?
A stock with a low (or small) float may be more volatile than a stock with a large float. Since there are fewer shares available, it may be harder to find a buyer or seller.
Liquidity—the ease in which an asset can be bought or sold at value—may impact that stock’s price. When there is a smaller volume, it could result in what’s known as a larger spread.
Breaking that down further:
First, the bid-ask spread. This is the difference between the ask price and the bid price for a security that is traded in a market, such as a stock. In an ideal world, everyone would agree on a price for a good and sing kumbaya and the transaction would be done.
But in the real world, there is usually a difference between what the buyer wants to spend and the price at which the seller is willing to release the good. You can almost think of it as electronic haggling, but really, it is the pressures of supply and demand at work.
The person selling will receive the bid price and the person paying gets the ask price. The bid-ask spread is the difference between the lowest price that a seller is willing to accept and the highest price that a buyer is willing to pay.
Next, volume. In a designated time period, volume is the number of shares of a stock will be traded in the market. (Volume may also refer to the number of total stock transactions in the market in a given period, but for the sake of understanding floating stock, it’s helpful to focus on one company for now.)
Every transaction will always involve two parties: the buyer and the seller. When buyers and sellers conduct a transaction at a specific price, it is just one transaction.
The number of transactions that take place in one day make up the volume—10 in a day means the volume is 10, 1,000 in a day equals a volume of 1,000.
A small stock float may coincide with a low trading volume of that same stock. When this happens, it may become more difficult to match buyers and sellers—potentially increasing the bid-ask spread. This can result in big price swings—volatility—in either direction for that stock.
An Example of Low Float
A real world example of low float may help illustrate how it can lead to increased volatility. According to Corporate Finance Institute®, Tilray (TLRY), the first cannabis stock traded on the NASDAQ exchange, is such an example.
Tilray has seen a precipitous rise in the price of its stock since its IPO in 2018. “In September 2018, the stock price of Tilray rallied dramatically.” So dramatically, in fact, that the “NASDAQ halted trading in the stock five times due to significant price swings” on Sept. 19 of the same month. “Tilray’s stock jumped 90 percent before falling and then eventually finishing the day up 38 percent.”
Apparently, the underlying driver of Tilray’s stock price volatility on Sept. 19 was due to its small free float. Corporate Finance Institute ® elaborates: “Tilray’s public float volume was 17.83 million shares and a resulting free float percentage of 23 percent, which is small compared to its peers.”
“Due to the small number of shares available to the public, the bid-ask spread for Tilray was very high—as much as $2.”
With the small number of shares available and potentially other factors (such as a high short interest in the stock), the stock endured a wildly volatile session.
Does Float Volume Change?
Short answer: Yes. A company’s stock float volume could change in either direction. First, it is always possible for restricted shares to become unrestricted, which would increase the float. (Or, vice versa.)
A company could also increase its overall shares outstanding, which very well could increase or decrease the stock float. Here’s an example: A company may want to create additional shares in a secondary offering, which is essentially a second IPO for companies that are already public.
All else equal, this may increase the stock float. Or, a company may decide to conduct a stock split, where shares are split into smaller portions with a lower trading price.
Conversely, a company can decrease its float by eliminating some of the available shares outstanding (and therefore the float) by doing a share buyback—where the company buys its own stock. Or, a company’s management can decide to do a reverse stock split, decreasing the float.
Placing a Trade
If you’re an investor looking to purchase what could potentially be a low float stock, you may want to consider how you will place this trade.
Many brokerages and trading platforms will provide you with different ways to place a trade, including market orders and limit orders.
With a market order, you are placing a trade with an emphasis of it happening as soon as possible. This may be thought of as a “typical” trade. With a market order, you are agreeing to the price at the time the trade is placed.
With a limit order, you are setting a price floor or ceiling for which you are willing to make that trade. If you are buying a stock, you could say that you are only willing to buy if the price drops below a certain price point.
If you are selling, you might say that you are only willing if the price rises above a certain level. This may give you more control over the price for which the stock trade is executed, but it also means that the trade might not get filled.
For a stock with a high bid-ask spread, these options provide the investor with a ceiling that they are willing to pay for that stock.
Ready to Invest?
Whether you’re an old pro at investing or looking to buy your first stock, there are some pointers you may want to keep in mind.
When researching stocks, you may find it helpful to buy what you know and what you like. Or, you may look to buy stocks that you believe are essential to American and global life.
You may also want to consider companies that are currently undervalued by the market; their current price doesn’t reflect their value.
As your skill level increases, you may want to research and invest in companies that round out a well-diversified portfolio—aka “don’t put all your eggs in one basket.”
Diversification is the concept of not loading up in one stock, or one industry or region of the market—such as only buying tech stocks or stocks with their headquarters in Germany. You may also want to diversify your asset classes.
If you’re not interested in building out your own portfolio via stocks, you can have funds to help with some of the heavy lifting. Funds, such as mutual funds or exchange-traded funds (ETFs), can be thought of as big baskets of stocks (or other security types), packaged together. You could potentially buy one fund that invests in a large, representative sample of the market.
For something totally hands-off, SoFi Invest® offers an automated investing service that manages a portfolio of ETFs in accordance with your goals and risk tolerance.
Whether you decide to invest in funds or in individual stocks, you may want to seek out ways to do this at a low cost to you. Any time you’re paying a fee or transaction charge to buy into an investment, that fee is taking a chomp out of your potential returns. SoFi Invest offers online stock trading with free transactions on stocks and ETFs.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.
New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
SOIN19178
