stock float

When people think about stocks, they usually imagine some person in front of a computer constantly calling people and screaming some numbers.

When the word “float” is thrown around, people might not know what it means, but the following should help explain what this means.

What Exactly is a Stock Float?

Stock floats aren’t something people hear about a lot, so it’s okay if one doesn’t know what does float mean in stocks. First of all, these types of stocks may not be something people hear about, but that doesn’t mean people aren’t exposed to them.

Each company has a lot of shares. Sometimes, these entities have millions or billions of stocks. Out of all the stocks a company owns, a sizable chunk is referred to as a float or stock float. These shares are the ones people can potentially acquire. Stock float can be analyzed using quantamental methods to determine its potential impact on the stock’s price and liquidity.

There has to be a distinction because there’s another type of stock or share that is locked-in. Those who want to calculate the amount of floating shares a company has have to subtract the locked-in shares from the company’s total share number.

It should be pointed out that locked-in shares are sometimes referred to as restricted shares or closely-held shares.

A restricted share exists for all sorts of reasons. Sometimes, this happens because these are a part of a package reserved for CEOs. In more progressive companies, restricted shares belong to employees themselves to give them additional motivation.

Why Does the Float Matter?

A share with a low float may be more unpredictable than a stock with a large one. Since there are fewer, it may be harder to find someone to buy or to sell.

According to a SoFi Invest article, “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.”

This should matter to investors because it means the price might be a little higher if the float is relatively low.

Of course, when the float is low and a person already owns stock, then this might be a pretty good time to sell.

When the float number is high, then there are a lot of stocks out there, and the price might not be as volatile. Some folks like when the stock isn’t so unpredictable, but figuring out when to buy is a personal choice.

Why Would a Float Change?

Okay, the float number can change for all sorts of reasons. Most of the time, it changes because folks are buying and selling stocks at all times, but there are other possibilities.

If for some reason the folks who own the restricted stocks all of a sudden decide to dump all of those stocks, then the float number might dramatically change.

The company itself could change the float number by simply selling off a secondary offering, which means they decided it was a good idea to create an additional IPO.

Some companies might decide to split a share to offer them at a more affordable price. Some companies might even pull the big buyback move and reduce the amount of available stocks by buying them back.

Paying attention to the float number helps investors who have the time to look at these numbers. This does take some work, and it might take some time to get used to seeing a new set of numbers, but it seems worth it.

Frequently Asked Questions

Why is stock float important?

It can impact a stock’s liquidity and price volatility. Generally, a smaller float can lead to higher volatility and larger price swings, while a larger float may result in more stable prices.

How is it calculated?

It’s calculated by subtracting closely held shares, such as those held by insiders and institutional investors, from the total shares outstanding.

Can stock float change?

Yes, it can change over time due to various factors, including secondary offerings, share buybacks, and insider trading activities.

How does it affect trading?

It can impact trading dynamics, as stocks with smaller floats may experience higher levels of volatility and potentially larger price movements in response to market demand and supply.

What role does it play in market manipulation?

Stock float can be manipulated by traders looking to artificially inflate or deflate a stock’s price by buying or selling large quantities of shares. Stocks with smaller floats are often more susceptible to manipulation due to their limited availability.

How does it relate to market capitalization?

Stock float is a component of market capitalization, which is calculated by multiplying the stock’s price by the total number of shares outstanding. A smaller float relative to the total shares outstanding can result in higher market capitalization ratios.

Are there any drawbacks to stocks with small floats?

While stocks with small floats can offer potential for rapid price appreciation, they also tend to be more volatile and may have wider bid-ask spreads, making them riskier investments for some traders.

How does stock float impact institutional investment decisions?

Institutional investors often consider stock float when making investment decisions, as a limited float can affect liquidity and the ease of buying or selling large positions without significantly impacting the stock’s price.