When you invest in the stock market, you are investing in risk and reward. Sometimes, your investment returns will be hugely satisfactory.
Other times, not so much. This is why it is very important to research any company you wish to invest in, as well as its stock, before you make any investing decisions (see also ‘How To Write An Investment Proposal‘).
One factor you need to carefully consider is the float of a company or organization.
A company’s float refers to a public company’s number of shares available for trading.
A float can be an exact number of the shares available or a percentage of the public company’s total shares that are outstanding.
In today’s post, we are going to guide you through what stock floats are, and discuss the difference between low and high float stocks (see also ‘What Is Considered A Low Float Stock?’).
Knowing this information is vital in helping you make more informed decisions when investing on the stock market.
Stock Float – Definition
A stock float, also called a floating stock, refers to the number of shares a free-trading company has on the secondary market.
Stock floats do not include shares that are held by directors, executives, or any insiders of companies, however.
Also excluded from stock floats are shares that are restricted for trading and those that are not currently available to sell (not eligible).
A stock float is incredibly important for investors to understand, as it gives them an idea of a company’s stock liquidity.
More often than not, investors start by studying the market capitalization.
This is because they can then see the full value of a company or organization.
This will also include all outstanding shares the company has.
However, if a significant amount of these outstanding shares are owned by insiders, the stock float’s true value will be a lot smaller.
You can view stock float in two main ways:
- You can check its absolute figure
- You can check its percentage
The absolute figure of a stock float is the total amount of free-trading shares.
The percentage displays the amount of stock float in relation to all the shares that are outstanding in a company.
What Is Low Float Stock?
To understand what low flat stock is, we need to explain high float stock, too.
A high float stock is a stock where most of a company’s outstanding shares are traded freely.
For instance, the majority of S&P 500 companies whose shares are dispersed by owners and insiders within the firm typically hold minor positions within the company.
Typically, the longer a company has traded publicly, the freer the stock will float.
A low float stock, on the other hand, sees insiders control large portions of the total outstanding stock of the firm.
Although you may think having low stock is bad for a company, this is not always the case. It’s often an indication that the insiders and public shareholders are in alignment with one another.
For instance, many investors like to invest in companies whose founder controls the firm or a family does.
A high stock float can be beneficial as it can offer increased liquidity. It can also help provide lower volatility in the price of shares.
A high stock is also more difficult for short-term traders to influence and try to affect the price of high float shares in a company, whereas this is more accessible with a small float.
There are a number of reasons why low floating shares. Below are some of the most common:
- The company has gone public through a SPAC (Special Purpose Acquisition Company) – This is quite a common occurrence where SPACs purchase a small portion of a total outstanding corporation. This results in the previous owners owning a large segment of the company’s total outstanding shares.
- The company has become a recent IPO (Initial Public Offering) – This is when a company issues stock to the general public. When a company does this for the first time, large pieces of the shareholder base that already exist become restricted in selling, but only for a certain amount of time after the IPO.
- The company has a sizable charitable association associated with it – On occasions, founders of a company may donate large proportions of their holding to an associated charity after they have passed away. If the charity holds these shares, they are usually not included in the float.
- The company is run by a family – Many companies are controlled by the founding family. In such cases, a minority stake is listed in the company to offer a public market and liquidity for the shares. Nevertheless, in most cases, such as these, the insiders of the company will retain the most share of stock.
- The company implements stock-based compensation – Many tech companies pay their staff with restricted stock options. However, these shares tend not to enter a float until they are available to trade freely again.
- The company purchases a great deal of stock back – Sometimes, a corporation may purchase back large portions of stock, thus reducing the share count that is outstanding significantly. Therefore, the share ownership of the company’s insiders then increases.
If you feel that low float stocks are of interest to your investment goals, you need to keep a close watch on how the stock performs.
Stock prices can be volatile, meaning their volumes and prices can rise and fall quickly and dramatically. Sometimes, this can happen several times during one day.
You must monitor the market to ensure that you buy and sell at the right time.
To sum up, low float stock is a stock that has a low number of shares. Stock float is a major component when it comes to understanding a firm’s shareholder base.
If it has a low float, the ownership base is typically strong, meaning executives and directors participate in running the business to a greater extent.
Just bear in mind that this can cause low float stocks to become more volatile when trading.