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 is a stock float?” may have you stumped.
Finding out the answer can play a major role in your investing future. Read on to learn about stock float.
Unpacking the Concept of Stock Float
So, what is a stock float exactly? 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 simply “the float.” Stock float is important because it indicates how many shares of a stock can be bought and traded by investors in general.
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.
Restricted stock generally refers to shares that cannot be traded without special exception from the Securities and Exchange Commission (SEC). 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.
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How Stock Float Influences Market Dynamics
Stock float is something investors find helpful because it indicates the ownership structure of a company. Also, the lower the stock float, the more volatile the stock may be. If there is more demand from investors than available stock to buy, that could send the price of the stock up. And if demand for the stock drops, the stock’s price could fall.
The Significance of Stock Float in Investing
Investors find stock float useful because it tells them how many shares of stock are available to be publicly bought and sold. It also offers an indication of a stock’s volatility, as noted above. A stock float that’s low could push up the price of the stock if there is great demand for it.
Analyzing the Impact of Float on Stock Performance
Stock float can indicate to investors how many shares of stock are available to buy and sell, and thus, how volatile a stock may be. Stocks with a higher float tend to be less volatile, while those with a lower float tend to have higher volatility.
Stock float is just one metric or tool investors can use to analyze a stock and how it might potentially perform.
Stock Float Compared: Authorized, Outstanding, and Floating Shares
Authorized shares are the most shares of stock that a company can issue. Outstanding shares are the number of shares the company actually has issued. A company does not have to issue all of its authorized shares.
Floating shares refers to the number of a company’s shares that can be bought and sold. Stock float is calculated by subtracting a company’s restricted 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.
This means that 85 million shares of this company’s stock are available for trade on the open market. 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.
Identifying and Interpreting the Float of a Stock
Identifying the float of a stock requires a fairly simple calculation. You can find a stock’s float by subtracting any restricted shares of the stock from the outstanding shares.
Typically, you can also look at a company’s balance sheet to find the number of outstanding shares and floating shares.
Interpreting What the Float Tells You About a Stock
The float of a stock tells you how many shares of that stock are available for buying or selling. Low float stocks (those with fewer shares available to buy and sell) tend to be more volatile, as discussed earlier, because there are fewer shares available for trading.
The Implications of Low vs High Stock Float
When considering low float stocks and high float stocks, the following are some things investors might want to keep in mind.
Advantages and Risks of Low-Float Stocks
The benefits of low-float stocks apply mainly to day traders who hope to earn big profits in a short period of time. Each trade of a low-float stock could have a big impact on the value of the stock. For example, if there’s good news about a company whose stock float is low, demand for the stock may rise, and the stock’s price could go up.
Conversely, if news about the company is bad, demand for the stock could plummet, along with the stock’s price. This leads to a greater level of risk for investors.
The Stability and Volatility Factor in High-Float Stocks
High-float stocks tend to be less volatile because there are more shares available for public trading. That makes them more stable overall because there are more shares of the stock in circulation. The price of high-float stocks tends to be more stable than low-float stocks.
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The Investor’s Guide to Low-Float Stocks
Trading low-float stocks can be one strategy day traders use. Here’s what to know about evaluating and trading these stocks.
Best Practices for Trading Low-Float Stocks
Trading low-float stocks involves risks. Because there are few shares available, it may be difficult to buy them when an investor wants them and also to sell them in time to make a profit — this is referred to as a lack of liquidity.
One way traders might handle this is to look for stocks with low float and high volume, which is the number of shares of stock being traded daily. The more shares being traded, the lower the chances might be that an investor will have to deal with lack of liquidity.
Strategies for Evaluating Low-Float Stock Potential
Traders can use technical analysis and look at indicators like candlestick charts and moving averages to help evaluate a low-float stock. This typically requires some knowledge and experience as an investor.
Other methods of evaluating a low-float stock include:
Low-float stocks with a high relative volume. Relative volume is a way to help gauge a stock’s liquidity. It indicates a stock’s volume currently compared to other times in the company’s history. A stock with low liquidity might be difficult for an investor to sell.
News about the company. Both good and bad news about a company can affect a low-float stock’s value. It could quickly go up or down.
Float percentage. This refers to the percentage of total shares of stock available for trading. Most traders look for a percentage between 10% and 25%.
Insights Into Stock Float and Market Manipulation
Stocks with a low float may be more vulnerable to market manipulation. When a stock has fewer shares available for trading, it could easily be affected by comments on social media, for instance. There are also schemes such as a “pump and dump” in which unscrupulous investors buy up many of the shares of a low-float stock, which could affect the price dramatically. They might then dump the stock.
Day trading is risky and can result in investors losing significant amounts (although they could potentially make significant gains). And low-float stocks can be susceptible to practices like market manipulation. Those with a low tolerance for risk may find that low-float stocks are not the best investment for them.
Deep Dive: Case Study and Example of Floating Stock
One recent example of a low-float stock is General Electric (GE). In early fall 2023, there were 1.088 billion outstanding shares of GE stock. Of this number, approximately 76% of shares were not available for public trading. The float in this case was 260 million shares. Consequently, GE’s stock price is considered fairly volatile.
Practical Tips for Trading and Investing in Floating Stocks
Low-float stocks can be highly volatile and their price can go up and down in minutes or even seconds. This volatility could eliminate a significant chunk of an investor’s portfolio. Of course, low-float stocks could also present substantial profit opportunities with potentially big gains. But they are risky.
Low-float stocks are typically appealing to those who are hoping to make larger gains in a short amount of time, such as day traders.
To successfully trade low-float stocks, investors should look at technical indicators and also follow the news. Watching the market every day is critical since the prices of these stocks can change so quickly.
Whether you’re investing in low-float stocks or any stock, remember that diversifying your portfolio is important and can help mitigate risk and potentially increase your returns, studies show.
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FAQ
Is a Low-Float Stock Good for Day Trading?
A low-float stock could potentially lead to big profits for day traders if the stock is in high demand. However, these stocks can be very risky since they are volatile. If demand drops, a trader could lose large sums.
How Does a Stock’s Float Affect Its Liquidity?
Stocks with a higher float have more liquidity, which can make it easier for investors to buy and sell them. Low-float stocks have less liquidity, which could make it more challenging to buy or sell them.
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