Low float stocks are a widely prevalent type of investment. They permit day traders to earn nonstop profits throughout a trading session. Low float stocks may also refer to the number of a company’s shares that are available to be traded in the open market. Low float stocks are the total number of company shares available for trading purposes in the market. You find the float of stock by subtracting the value of closely-held shares and value of the restricted stock from the total outstanding company shares at that point in time.
What is float in stocks? Or what are low float stocks?
The float of a stock measures the number of shares of a specific stock. It shows the number of stock shares available for trading. The measure does not embrace closely-held shares owned by controlling investors or company owners.
Calculating floating stock needs looking at a company’s balance sheet. It involves taking the total number of company shares and subtracting any restricted and closely held shares. Like the S&P 500, stock indexes frequently use floating stock as the ground for working out the market cap – outstanding shares total value in dollars – of a company.
Low float stocks have a tiny number of shares marked for trading.
Investors generally consider a 20 million share float a low float. However, there are companies with floats less than a million. Large corporations have floats in billions. You may find even lower float stock trading on OTC stock exchanges.
Low float companies frequently have a large part of their equity held by controlling investors like employees and directors. This leaves only a tiny percentage of the stock to public trading. The limited nature of the supply may lead to dramatic price swings in case demand changes abruptly.
Given that low float stocks have fewer shares available, investors may find it more challenging to find a buyer or seller for them. Thus rendered more volatile, they will attract investors even more. As a result, low float stock bid/ask spread is generally high as well.
Floating stock is the number of a company’s outstanding shares that are available for trading. The number is equal to the total outstanding shares minus any restricted shares and company insiders’ closely-held shares. If you know the number of floating shares, you have an indication of the stock’s liquidity and volatility.
For instance, if merely 10% or 20% of outstanding shares are available to trade, the company’s shares can reasonably be said to have a low float. The low float might single out that it would likely be challenging to find buyers and sellers for shares in some cases.
How does floating stock work?
A company’s floating stock’s level attracts investors. It’s an indicator of the percentage of total shares outstanding that are owned by company insiders, like directors and company officers. Notwithstanding its not being part of the float calculation, investors ought nevertheless to think of the percentage of the shares owned by major institutional investors, like major mutual funds, pension funds, etc.
A company with a low floating stock percentage relative to total shares outstanding may indicate that this could be a challenging stock to buy and sell. There may be times of low liquidity relative to stocks with a high level of float. And when the number of shares available is not that high, buying and selling the remaining ones lends to the enhancement of the stock’s volatility. Unsurprisingly, a large number of institutional investors could opt to trade in company shares with a large float.
A prominent instance is the Apple float – ticker AAPL. Apple float percentage in June 2021 was 99.9% of the total shares outstanding. Ownership by corporate insiders was 0.07% of 16.53 billion shares.
Stock splits may have a major effect on the stock float of a company. For instance, a 2-for-1 split – in which one share splits into two – would enhance the floating shares’ number. On the other hand, a reverse stock split affording you one share for every two you possess will cut down the number of floating shares. Even as the number of floating shares would change, the floating share percentage would not.
What does shares outstanding mean?
Shares outstanding help explain low float stocks. Shares outstanding are the total number of shares issued by a company. This includes those that cannot be traded.
The float denotes the number of shares out of the shares outstanding available for public trade. This is the float percentage. Companies could have many shares outstanding, but only a small percentage is floating stock.
Floating stock amounts experience fluid changes. Companies could sell more stock to raise money. Conversely, shareholders in the company might sell holdings. Floating shares increase/decrease when a stock undergoes a split or reverse split.
Floating stock compared to shares outstanding
Shares outstanding is a reference to a company’s stock shares. Shareholders would include company insiders, institutional investors, and the investing public in general. Floating stock is the total of outstanding shares minus shares that corporations and individuals closely linked with the company hold.
The product of a company’s outstanding shares times the stock share price is market capitalisation. The market cap is fluid. Another version of the market cap is the free-float market cap. It’s only the product of floating shares multiplied by the market price per share. S&P 500 and the Dow Jones Industrial Average use this method.
It’s noteworthy that a low float percentage may affect a company’s market cap. Moreover, in a number of cases, the market benchmark will include its stock.
How is stock float important for individual investors?
A company’s stock float will have little consequence for the largest number of individual investors. This also applies when the investor does all or most of their investing using pooled investment vehicles – like mutual funds and ETFs – that invest in multiple stock holdings.
Stock float will not affect individual investors who are habitual buyers and holders of stock shares for a prolonged time period.
A stock’s float percentage level could affect investors who trade in and out of a trade very often. Investors could meet liquidity issues for low float percentage stocks when attempting to buy or sell. This could lead to a larger bid-ask spread. The implication would be that they might have to sell shares at a lower price and buy at a higher price. In rarer situations, this could majorly affect an investor’s profit.
Conversely, some investors would prefer seeing stocks with a comparatively low float. This indicates that the company insiders the stock’s future prospects.
It is vital to understand that low float stock prices may be majorly affected by trades made by shareholders.
Is low float good for a stock? Or examples of floating stock – Assessing low float stocks
High relative value
The relative volume indicates a stock’s current volume relative to earlier time frames. This affects a stock’s liquidity. In case a stock has low liquidity, traders may potentially be burdened with shares they are unable to sell.
They may also have no capacity to take advantage of news catalysts with an important buy or sell. A stock may not be a good pick if there’s little trading volume notwithstanding the stock’s changing prices.
News catalysts
Company news – negative or positive – frequently makes a low float increase/decrease in a short amount of time.
Day traders keep a close eye on the stock market and corporate news. The focus is on stocks that are likely to make moves. A news event may lead to a low float stock to move anywhere from 50% to 200% in one day.
Float percentage
Float percentage denotes total stock share percentage to hand for trading. Each trader has their likes/dislikes for float percentage. However, most look for a percentage between 10-25%.
How do you find the float of a stock? Or How to find the float of a stock?
The number of outstanding shares does not always stand for the floating stock amount. The formula below may be used to calculate the floating stock:
Floating stock = outstanding shares – restricted shares – Institution -owned shares – ESOPs
Here
Restricted shares may not be traded till the lock-up period after the IPO or Initial Public Offering is over. The shares are not transferable.
ESOP is an employee stock ownership plan in a company via which the employees get an ownership interest.
For instance, a company has 5 million outstanding shares. Nonetheless, out of the 5 million shares, 3.5 million shares are owned by large institutions, management owns 0.5 million shares, and 0.3 million sarees are ESOP contributions.
Therefore the floating stock is a mere 0.7 million.
5 million – 3.5 million – 0.5 million – 0.3 million.
The floating stock as a percentage of outstanding stock will be 14%.
0.7 million/5 million = 0.14 x 100.
Floating stock : features
- A company stock’s floating stock number ads investors in understanding the number of shares available to them for trading in the market;
- Floating stock higher percentage indicates a lower amount of controlled shares, or institution/management/insider owned blocks;
- floating stock amount aids in defining a stock’s volatility and liquidity;
- A large floating stock number shows the high availability of shares for trading. Buying and selling therefore becomes easier. A larger investor pool is attracted. Institutional investors aim to invest in large blocks of a company’s stocks with a larger float. Nonetheless, the share price will not be impacted by large purchases;
- High floating stock companies have share prices that are news-sensitive. The liquidity and volatility permits more opportunity for buying/selling of stocks;
- The floating stock number indicates the shares of a company’s specific stock owned by the public. Contingent upon their goals, companies may determine to increase/decrease that amount.
Floating stocks: limitations
Floating stock with a small float will have a lesser number of investors given the low availability of stock. The latter disincentives investors from investing. The company’s business prospects would not count here; trying to enhance the floating stock, a company would issue extra shares notwithstanding the affordability. This could lead to stock dilution. That would not please the existing shareholders.
Which broker trades low float stocks best?
- All brokers, obviously, are not the same. When you are looking for a broker who trades low float stocks very skillfully, you will have to look for the following features:
- Do they trade the class of low float stocks you are looking for? ;
- Will the broker’s policies be in sync with your strategy if you are planning on short sales? ;
- Ascertain in advance the quantum of commission you’ll be paying;
- The trading platform has to be in sync with your goals;
- All the better if your broker offers a screener for low float stocks.
PrimeFin scores high on all the above-mentioned criteria.
Conclusion
Low float stock share prices may appreciate/depreciate more swiftly than those of companies with plenty of shares for the public to trade. Supply and demand dynamics permit low float stocks to be popular with day traders. To keep potential risks in check, traders try to find the significant volume and the pending arrival of some significant catalyst to compel the stock to move.
