Investing in stocks is a pastime that has become increasingly popular in recent years – and it is easy to see why.
The stock market offers investors the chance to make money from their investments, but also provides them with an opportunity to build wealth over time.
The most important thing to remember when investing in stocks is that you should never invest more than you can afford to lose – and this requires understanding the different types of stock, and the ways that they can impact your overall investment, and this includes low float stocks.
To help you better understand low float stocks, we have put together all that you need to know.
What Are Low Float Stocks?
Low float stocks are shares that remain once the stock of a company has been issued to controlling investors, and this means that there tend to be fewer of this type of stock available for the public to purchase.
This is because these shares are usually held by institutional investors such as pension funds or mutual funds, who will only buy up so many shares before selling on to other investors.
This means that if you want to invest in low float stocks, you need to find out which companies are being held by institutions like this, and then look at how much of each share is owned by these investors.
You may even want to consider buying into companies that are already listed on major exchanges, as this will mean that you do not have to worry about finding out whether the shares are actually being traded.
Companies issue shares in order to raise capital, and this helps them to fund new projects, expand their operations, and grow their businesses. They also use this method to pay dividends to shareholders and to reward employees.
Companies often choose to list their shares on the stock exchange after they have raised enough money through private equity funding, or through debt financing.
This allows them to access the financial markets and gives them access to additional sources of finance.
How Can I Find Out Which Companies Have Low Float Stocks?
You can start by looking online, where you will find plenty of websites that offer information on the floatation status of individual companies. Some of these sites include:
- Yahoo Finance
This site lists the floatation status of thousands of companies, and you can search by name, industry sector, or location.
It also shows you how many shares are currently outstanding, and what percentage of those shares are owned by insiders.
- Google Finance
This site lets you search for specific companies, and it will show you how many shares are outstanding, and how many are owned by insiders. It does not provide any details on the floatation status, however.
- Bloomberg
This site provides detailed information on the floatation statuses of hundreds of companies, including details on the number of shares outstanding, and the percentage of shares owned by insiders.
What Are The Advantages Of Low Float Stocks?
There are a number of advantages to trading low float stocks, and some of these include:
- Reduced Volatility
Low float stocks (see also ‘What Is Float In Stocks?‘) tend to be less volatile than high float stocks because there is less risk of share price fluctuations due to large amounts of shares being available for sale.
- Higher Returns
Low float stocks tend to have higher returns than high float stocks, as they typically trade at a discount to NAV.
This means that if you invest in them, you should expect to make more money than if you invested in a similar stock that has a higher floatation ratio.
- Better Investment Opportunities
Low float stocks often represent smaller businesses, which may be more attractive investment opportunities than larger companies.
They also tend to be less well-known, so you won’t get as much competition when buying them.
- Lower Risk
Low float stocks tend not to be as risky as high float stocks, since they don’t hold such a large amount of shares.
As a result, they’re usually less likely to fall victim to corporate scandals.
Disadvantages Of Trading Low Float Stocks
Although low float stocks can offer great potential benefits, they do come with their own disadvantages too. Some of these include:
- Less Liquidity
Low float stocks tend not to trade as frequently as other types of stocks, so they can be harder to buy and sell. If you want to buy one, you’ll need to find someone who wants to sell it first.
- More Competition
Because low float stocks tend to be relatively unknown, they may be subject to greater competition from other investors.
You may therefore struggle to find an undervalued stock that’s suitable for your portfolio.
How To Invest In Low Float Stocks
If you’d like to start investing in low float stocks, here are some tips on how to go about doing so.
- Find Undervalued Shares
You should look for low float stocks that are trading below their net asset value (NAV), rather than above it.
This will give you a better chance of finding a good investment opportunity.
- Buy When Shares Become Available For Sale
You should try to buy low float stocks when they become available for sale.
This way, you’ll avoid having to pay any fees or commissions when buying them.
- Consider Buying On Secondary Markets
You might consider buying low float stocks on secondary markets, such as OTC Bulletin Board or Pink Sheets.
These sites allow you to purchase shares without paying any brokerage fees.
- Use Insider Ownership Data To Your Advantage
You should use insider ownership data to help identify low float stocks.
This information shows whether certain shareholders have sold off their holdings, which could indicate that they’re planning to unload their shares.
Final Thoughts
Investing in low float stocks can be a great way to build wealth over the long term.
However, it does come with its own set of risks. Before you decide to invest in any particular company, you should carefully weigh up all the pros and cons of each option before making your final decision.
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