Why is it essential for investors to know a company's floating stock? Read this article to have an insight into what is float in stocks?
Investing in the stock market is always a risk, which is why it is essential to thoroughly research any company and its stock before making any decisions. One piece of information you will want to pay close attention to is float, which is the number of shares a public company has available for trading.
The float is a term used to describe the number of shares a company has available for public trading. As an investor, you will hear the phrase “the float” a lot. It may seem overwhelming at first to learn new financial concepts when starting investing; however, in reality, it is pretty simple once you know a few key terms. It often comes off like learning a new language: once you have a few essential words down, you can make floating stock knowledge more accessible and faster.
The float in stocks means the number of outstanding shares available for public trading. Even if the shares sold on public trading get sold or issued again, the investors will still consider that stock as public shares.
A company with a low number of shares available has a low float, and it may be difficult to find sellers or buyers due to fewer shares available to trade. Hence, a small float stock will usually have more volatility than a large float stock.
The floating stock of a company may vary over time; if a company sells additional shares to secure more capital, the floating stock increases. On the contrary, if the company buys back the shares, the outstanding stock will decrease; hence, the percentage of floating stock will fall.
Let’s explore what floats in stocks, find and trade them, and some of the risks and benefits to these types of trades.
The float is a flexible way of providing value to a company and its shareholders. One instance where this plays out is through initial public offerings (IPOs). Insiders hold on to their shares during what’s called a lock-up period in financial terms. This period gives the company time to establish a price rather than having insiders cash out as soon as possible. Prices usually pop right at the opening for IPOs.
Investors’ float increases when insiders get the green light to sell their shares. Subsequently, this can make the share price drop in the short term. A well-established company will bounce right back, though. Keeping an eye on the stock float can help you predict a stock’s direction.
You can watch events affecting the share price to know how much the stock float insiders have. For example, if insiders own 25% of the float shares, it will affect the stock price when they sell. If they own 50% of the stock float, the impact will be more significant. There are many ways a company can influence its share price. It can issue more shares than are already in the market, causing share dilution.
How to find the float of a stock?
You can find this information from a company’s public filings, various stock websites that specialize in this information, and sporadic list-style articles from investing sites. In the latter case, you can look at how the site sources its data to verify the quality of the information it provides.
To find the float of stock, you must understand that the number of outstanding shares of a company does not always represent the floating stock amount. Use the following formula to find the floating stock figure:
Floating Stock = Outstanding Shares – Restricted Shares – Institution-owned Shares – ESOPs
However, Restricted shares cannot be traded until the lock-up period after the initial public offering (IPO) is over. The shares are non-transferable. Employee Stock Ownership Plan (ESOP) is an employee stock ownership plan in a company through which the employees get an ownership interest.
What is a good float percentage?
The float percentage 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%. As an investor, if the question arises in your mind whether floating shares can be higher than shares outstanding? The answer is no!
The float in stocks is always a petite figure because it only counts the number of shares available for investment and trading on financial exchanges. On the contrary, shares outstanding include both tradable shares on the open market and any restricted or closely-held/insider stock, all shares that a company has issued. Thus, the float is always a portion of shares outstanding.
What is a good float for a stock?
Investors view anything above 20 million shares as a “good float” for a company. With volumes like this, trading can remain high, and the market can avoid illiquidity, which increases volatility and the bid-ask spread. Floats below 20 percent of all outstanding shares are considered low-float stocks.
There is not necessarily one best float rate that investors should look for when making their buying decisions. Instead, it comes down to each individual’s priorities and investing needs.
Some people might prefer high float stocks such as those with a high percentage of their outstanding shares available to the public. These stocks are more liquid, meaning investors will have an easier time selling them if and when they want to.
Many traders prefer low float stocks because of their greater volatility. Low float stocks have fewer shares available to the public. The supply is low, so the price goes up when demand increases. Speculative investors may buy these stocks, expecting the demand to increase significantly in the near future. It’s important to note that all stock prices are reactive to supply and demand. But the reaction can be extreme in the case of low-float stocks because the low supply makes the increased or decreased volume have a more exaggerated effect.
In terms of market clearing, it is suitable for stocks to have a high float. With more liquidity, the bid-ask spread narrows, and investors can buy and sell more confidently. High float, however, indicates that the general investing public owns the shares, not the operators. Thus, operators may not have a strong enough incentive to do a good job.
What does a floating stock tell you?
There are three stocks based on float: low-float, medium-float, and high-float stocks. Each of these classifications presents essential details about the stock.
Low-float stocks: stocks with less than 10-million-share floats
Low-float stocks, or less than 10-million-share floats, are highly volatile due to the small number of overall shares to trade; every trade has a significant impact on the value of the stock. This impact can lead to wide swings in price and, usually, large bid spreads, such as the difference between the price at which an investor can purchase a share of stock and the price at which a company can sell a share.
Due to the dramatic expected changes involved in investing in low-float companies, there is a higher level of risk when investing in these stocks. Moreover, it is essential to look into the number of outstanding stocks with low floats to better understand these companies’ share structures.
If a float is low because insiders own most shares, the general investing public has little say regarding matters requiring votes. Thus, low-float stocks are not best for you if you want to hold a company’s stock to have a meaningful say.
Medium-float stocks: stocks with between 10 to 15-million-share floats
Medium-float stocks currently have between 10 million and 15 million shares available for trading. Share structure and voting power may still be a concern at this level, but it is less likely.
Medium-float stocks can still take you on a pretty wild ride in terms of volatility. Although they are not as volatile as low-float stocks, they are known for broad movements in one direction and still come with an added level of risk compared to high-float stocks. Nonetheless, medium-float stocks are far more predictable than low-float stocks while still offering the potential to take advantage of dramatic runs in value, making them a favorite among day traders.
High-float stocks: stocks with more than 15-million-share floats
Finally, high-float stocks have more than 15 million shares within their float. High-float stocks tend to be larger companies. The higher the float, the lower the volatility because each share purchase will represent a smaller percentage of the overall company.
Companies with higher stock floats may also have lower levels of insider ownership. While a low level of insider ownership means that the general shareholder has more say in how the company should commence its operations, it could also mean that insiders did not purchase shares because they do not expect steady growth ahead. So, even if a high float is there, stable gains may not be the outcome.
Moreover, not all high-float stocks have low levels of insider ownership. Large companies that trade with large market capitalizations generally have more shares and just about always fall into the high-float stock category, regardless of insider ownership levels.
Pros and cons of high-float stocks and low-float stocks
Earlier, we discussed high-float, medium-float, and low-float stocks. Now we will inform you about the pros and cons of these stocks. The purpose is to facilitate you to make an informed decision.
High-float stock pros & cons
Generally, investors prefer buying high-float stocks. It is easier for investors to buy and sell these stocks due to low demand. Amazon and Walmart both have incredibly high floats. However, not all high-float stocks are created equal, and investing in them has pros and cons.
Pros of high-float stock
There are several benefits to investing in stocks with high floats. Some of the most important of these benefits include:
- A history: Most stocks in the high-float category are large companies with a high number of shares to make the per-share value of their stock affordable for the average investor. Many of these companies have a long history of dominance in their respective industry. This strong history of success indicates future success.
- Stability: Investors looking for stable growth without a high risk of significant single-session losses prefer high-float stocks, as these tend to be slow, steady movers.
- Investor’s opinion matters: Some investors like investing in stocks that make them feel like their opinion matters. Insiders will rarely own more than 50% of a high-float stock, meaning that essential 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 of high-float stock
Every investor knows there is no reward without risk. So is the case with high-float stocks. Hence, let’s discuss the few drawbacks of investing in high-float stocks.
- Less opportunity for momentum: Due to the nature of high-float stocks, there is low volatility, which means there is less potential for significant short-term runs in value, as are often seen with low-float stocks.
- Low insider ownership: Unless you are looking at a well-established blue-chip stock, a low level of insider ownership should appear as a big red flag. If insiders do not believe enough in the company to put their own skin in the game, why should you? Thus, it is essential to look for well-established companies rather than companies where the insiders are reluctant to invest when investing in high-float stocks. Although, it can be difficult for beginner investors to make that distinction.
- Your vote is not as valued as you think: Some investors like high-float stocks because the lower levels of insider ownership mean the investing community has a say in the company’s decisions. However, you must understand on an extraordinary level that your vote may not be as valuable as you think. Especially in the case when your vote would go against the grain. Remember, a high-float stock has at least 15 million shares available for trading. To have any real voting power as a singular voter, you would have to own a significant portion of that multimillion-share float.
Low-float stock pros & cons
Low-float stocks can undoubtedly entice a large portion of investors with distinctive capabilities. Here are some pros and cons to consider in low-float stocks:
As is the case with high-float stocks, there are plenty of benefits to investing in low-float stocks. Some of the most critical include:
- Momentum opportunities: Due to the highly volatile nature of low-float stocks, it is common to see dramatic short-term runs in value in these stocks. So, if you are comfortable with higher levels of risk and looking for massive short-term opportunities, low-float stocks are your go-to option.
- High levels of insider ownership: Although this is not always the case, sometimes low-float stocks have low floats because insiders believe so much in the future of the company that they have purchased a large percentage of outstanding shares. When insiders have a high level of skin in the game, it indicates that the company is moving in the right direction.
- Any catalyst can trigger high demand: By nature, low-float stocks have a limited supply of shares available. As a result, any news, even the most minor announcement, can trigger an increase in demand, leading to a dramatic rise in the stock’s price.
Although there are plenty of reasons to consider low-float stocks for your portfolio, you must know that the grass is not always green on the other side of the fence. Before diving into the low-float-stock swimming pool, there are a few drawbacks to consider.
- Volatility Is dangerous: The high levels of volatility in low-float stocks can lead to dramatic gains. However, losses have the potential to be just as significant. Therefore, low-float stocks are not appropriate investment vehicles for risk-averse investors.
- Lesser-known companies: Low-float stocks tend to represent lesser-known companies. These companies are far from household names, and while they may have built an exciting new business, often these businesses present more questions than answers. When investing in low-float stocks, it is important to do additional research to ensure that you are getting involved in a company with possibilities for the future.
- Liquidity risk: Sometimes, low-float stocks can be in high demand, and the value of the stock will rise. Contrarily, these lesser-known stocks may not have much demand at all, making them difficult to sell once you own them.
Why stock floats are important to investors?
When investors put money into a company, they want it to be profitable long-term. The higher the profits in the future, the faster they can grow their wealth. Not all firms achieve long-term success, however.
Float matters because of operator incentives. If executives have stakes in the companies they run, they are much more likely to put in the effort required to succeed. Just like conventional investors, they have partial ownership over future profits, so long-term performance matters to them. Therefore, if a company has low float, insiders are highly invested in its success. Executives are not just there to pick up a salary: Their investment is also on the line.
The reason investors care about float is liquidity: If the share float is low, let’s say, less than 40%, then there may be times when there are not enough shares in the market, which can lead to high price volatility. Low-float share prices spike when demand is high and trough when low, compared to conventional high-float stocks.
For this reason, institutional investors such as hedge funds, banks, pension funds, and so on – don’t like low-float stock. They want high returns with low volatility.
Features of a floating stock
- The floating stock number of a company’s stock helps investors understand how many shares are available for trading in the market.
- A higher percentage of floating stock indicates fewer controlled shares or large blocks owned by institutions, the management, or other insiders.
- The floating stock amount helps define a stock’s liquidity and volatility.
- A sizable floating stock number reflects the high availability of shares for trading. Hence, it makes buying and selling more accessible, thus attracting a larger pool of investors. Institutional investors seek to invest in large blocks of a company’s stocks with a more giant float. However, these large purchases will not affect the share price.
- Companies with high floating stock have share prices that are highly sensitive to company or industry news. This volatility and liquidity allow more opportunities to buy and sell the stock.
- The floating stock number reflects the shares of a company’s particular stock owned by the public. Companies may decide to increase or decrease that amount depending on their goals.
Limitations of a floating stock
- Floating stock with a small float will have fewer investors since the low availability of stocks discourages investors from investing. This lack of availability may discourage many investors despite the company’s business prospects.
- A company may issue extra shares to increase the floating stock even if additional capital is not required. Such an action will lead to stock dilution, much to the dismay of the existing shareholders.
Why do companies float the stocks?
There are several reasons for which companies opt for floating stocks. Let’s walk you through these reasons.
Existing investors can sell their shares as part of the flotation
- Venture capitalists may want to realize their initial investment once the business has become more established.
- A founder may want to realize part or all of the value built up in the business.
The company can raise capital
- New shares are often issued as part of the flotation.
- This can be the best form of financing for companies with volatile or low cash flow or which already have substantial borrowings.
Investors will be able to trade the company’s shares
- Shares which can be sold are more attractive to investors.
- The company’s shareholder base can be widened, increasing the potential for raising future capital.
The float provides a market valuation for the company’s shares
- An initial float on a public market, offering a small percentage of the company’s equity, may make it easier to sell further shares in the future.
- Key employees can see the value of shares or share options which they have been (or will be) granted.
The company may be able to use its shares as an acquisition currency
- It may be possible to fund future acquisitions entirely or partly in shares.
Floating stock helps increase a company’s public profile
- Going public raises the company’s status with customers and suppliers.
Everyone investing in stocks looks for the ones with the perfect balance of risk and reward for the amount they invest in. This search gets intense for the market investors, who invest in floating stocks. Unlike a layman, they are well aware of what is float in stocks. Suppose a company has a simple yet strong narrative about its business, products, and services. In that case, it becomes helpful for investors to know on which plan they may base their investment decision.
Float in stocks describes how many shares of a company’s stock are actually on the stock market. Stock floats tell investors quite a bit. It helps to gauge potential risk, reward, and ownership structure, which are very important to investors.
Investors must evaluate the perfect concoction of risk and reward while investing in stocks. Investors look for the availability of regular shares while investing in a company. However, this becomes tricky, and that’s why they tend to consider stock float. Looking at a company’s float can give you plenty of insight into the actual state of the underlying business; however, the more critical factor is that float has a noticeable impact on volatility.