The following guide will look at the ins and outs of stock float, why it matters to investors, and how it can determine the kind of return you can expect.
When investing in stocks, it is essential to do your homework before making any decisions. One key piece of information you'll want to pay close attention to is the stock's free float and how its size can affect investment risk.
DEFINITION OF FLOAT IN INVENTORY
Free float in stocks refers to the number of public stocks available for trading in the open market. This is not the total shares outstanding, as it excludes all closely held and restricted shares. Simply put, a stock's free float tells you how many shares can be bought or sold at the current time.
Calculating free float shares requires you to subtract the number of closely held and restricted shares from the number of shares outstanding.
Restricted shares are those that are not available for trading for a certain period because they are in a lock-up period following an initial public offering (IPO). Closely held shares, on the other hand, can be held by company insiders, major shareholders or employees.
LOW VS HIGH FLOATING STOCK
Since free float is the number of shares available for public trading, it is subject to fluctuations over time and is influenced by various conditions. Generally categorized as high and low, knowing the size of the float will shed light on the stock's volatility and liquidity.
High floating stock
A stock float is considered high if it has a large number of shares available for trading, normally with more than 15 million shares in its float. A high stock market float is often observed in large companies.
Due to many free float actions, its liquidity can absorb any large movements. The lack of scarcity means that value is often balanced with the number of shares traded. Since it takes more effort to move the price, stocks with high free float tend to be more predictable and less volatile.
As stable and predictable stocks, high float stocks are preferred by investors looking for stable, long-term growth without the increased risk of large single-day losses.
Benefits of High Float Shares for Investors:
- Most stocks in the high float category are large companies with a high number of shares to make the price per share affordable for the average investor. Additionally, many of these companies are titans in their industry with a long history of dominance in their respective markets. Investing in a successful, long-standing business is, of course, a much safer bet;
- Ideal for investors looking for stable and steady growth;
- Insiders will rarely own more than 50% of a high float value stock, which means that large shareholder votes in companies with high float value stocks usually follow what the investment community wants to see, as they hold the majority of the company's shares.
High Disadvantages of Floating Stocks for Investors:
- Due to the calm nature of high float stocks, there is less potential for big short-term gains;
- Low insider ownership can also be seen as a disadvantage. If company insiders don't want to put their money in the game, it's worth considering whether you should. Therefore, when investing in high float stocks, be sure to look for well-established companies;
- Since high-float companies have at least 15 million shares available on the open market, to have real voting power as a sole investor, you would need to own a significant portion of that multi-million float.
VALUATION OF FLOATING STOCKS WITH LOW SECURITY CONTENT
A few things to consider when considering investing in low float stocks:
- Relative Volume (RVOL) : Relative volume indicates the current trading volume of the company's stock compared to previous volumes. This indicator is essential for investors because it can affect the liquidity of the stock. Low liquidity means investors are potentially stuck with stocks they can't sell.
- News Catalysts: Positive or negative news can have an immense impact on the low value of floating stocks. Keep an eye on the stock market and company news to predict which stocks are likely to make moves. A news event can cause a low-float stock to move between 50% and 200% in a single day because they are in short supply.
- Free float percentage : This is the percentage of the total shares available for trading. Each trader has their specific preference, but most are looking for a rate between 10 and 25%. Consideration should be given to: the size of the stock float and for how long, why it is low, and whether there has been a reverse stock split (merging of stocks to form a smaller number of shares of proportional value).
Low floating stock prices can move significantly due to low volume activity. Source: Centerpointsecurities.com
FREE FLOAT VS AUTHORIZED SHARES VS OUTSTANDING SHARES: KEY DIFFERENCES
A company's shares can be organized into three different classifications , depending on its status:
- Outstanding shares are the total number of shares a company has issued. This includes all closely held and restricted stocks and those available for public trading.
- Authorized shares are the maximum amount of shares that a company is legally allowed to issue. It includes all stocks that have already been released, as well as stocks that have management approval but have not yet been released to the trading market. The number of authorized shares is indicated when the company is created.
- Free float indicates the number of shares available to the general investing public for trading. It excludes any shares that are restricted or held in narrow units.
IN CONCLUSION
In summary, a stock float is the total number of shares available to the investing public to buy and sell. Company float is an excellent measure of potential risk and return, as well as ownership structure – all of which are of great importance to an investor.
Keep in mind that stock floats have an inverse relationship with risk, with high float stocks being less risky than low float stocks. Therefore, it is essential to determine what you are looking for as an investor; is it stable growth and long-term gains, or momentum with significant potential short-term returns.
FREQUENTLY ASKED QUESTIONS ABOUT STOCK FLOAT:
How to calculate the float?
Share float is calculated by deducting the company's restricted and closely held shares from its outstanding shares.
What is a low float stock?
When a company has a low percentage of shares available for public trading, it is considered to have low free float. Low stock supply leads to higher volatility and therefore wide bid and ask prices.
Why trade low float stocks?
The high volatility of low float stocks makes them more likely to perform well in the short term. So if you're comfortable with high levels of stress and have done your research, low-float stocks can surprise you with impressive short-term gains.
What is a high floating stock?
When a company has a high percentage of shares available for public trading, it is considered to have a high floating stock. A higher supply of stocks results in more stable stock price movements, making high float stocks a reasonably low-risk investment.
Why should you consider high float stocks?
The stability and predictability of high float stocks makes it a good option for long-term gains. So if you're a risk-averse investor looking to invest in stocks that will rise over time, high float stocks can present a lucrative long-term investment strategy.
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