Investors have their own language when discussing shares of a company’s stock — at least it appears that way. Members of the general investing public may not understand the float of a stock when it is initially mentioned, but don’t get discouraged if you’re unfamiliar.
Stock float is just one of the many investor phrases to get acquainted with on the stock market. It’s an important one, too, especially for day-traders looking to strike gold.
Separating good float and bad float is merely a decision made by the investor. What is good for one strategy or goal may be unfavorable to another in terms of a company’s float.
Ready to learn more about float in stocks? Let’s go!
What Are Stocks?
Stock is an outlet for a publicly-traded company to raise money or capital, promoting future growth and expansion.
It’s also an advantageous way for companies to hire and retain top talent and for institutional investors and company insiders to gain ownership of otherwise restricted stock.
A company’s stock is open to the public on the secondary market after it is offered to the primary one. This is where the initial public offering (IPO) revs its engine, outlining the price and fine details on the shares.
Before we begin, let’s highlight the different classifications of a company’s stock.
Stock can fall into the following categories:
- Authorized Shares - the maximum number of new shares a company could issue before reaching its market cap.
- Outstanding Shares - the number of shares that exist to the public (including restricted shares)
- Float percentage - the available shares for traders to buy and sell. This figure is usually written as a percentage of a company’s total outstanding shares on the open market.
The last, stock float, is what we will focus on in this article.
What Is Float In Stock?
The number of shares available rises and falls like a balloon over any period of time. The balloon drifts up, up, and away into the sky. However, as the value of the gas depletes, it gradually comes back down to the ground.
Stock float refers to the total number of shares available for trading in a particular stock. It’s useful when it comes to determining the liquidity of a stock and its volatility.
When we talk about float in stock, we are referencing individual shares. It is not to be confused with floating rate funds, which affect mutual funds.
Calculating Float in Stock
The formula for calculating stock float reads as follows:
Floating Stock = Outstanding Shares - Restricted Shares - Institution-owned Shares - ESOPs
Outstanding Shares
The total number of shares authorized, issued, and purchased by investors before being traded on the secondary market.
Outstanding shares increase when a company issues additional shares, boosting trading volume through a method like a stock split. They decrease when a company decides to buy it back through a share buyback program or other means, thus changing their ownership structure.
The formula to calculate outstanding shares reads:
Outstanding Shares = Issued Stock - Treasury Stock
Restricted Shares
Restricted shares are included in the total number of outstanding shares.
If something is restricted, it is off-limits for a specified period. Restricted shares are not available to day traders or other investors in the market. They are held for a specific individual by the company.
For example, an employee may be awarded stock for performance or a sign-on bonus. Once conditions a, b, and c are met, the employee is allowed to exercise options.
Institution-owned Shares
Institutions may hold a large portion of a company’s stock. These include mutual funds, pension funds, investment banks, hedge funds, and more.
ESOPs
ESOP stands for Employee Stock Ownership Plan. In other words, it’s a benefit option companies provide to their employees.
A trust fund is created by the company holding the shares. What’s the added benefit? Contributions made to the trust fund on behalf of the company are tax-deductible.
Stock Float Exclusions
Stock float does not include shares that are:
- Closely-held
- Owned by controlling investors or,
- Owned by company owners
Stock Float and Dilution
A company may decide to issue additional shares of stock for numerous reasons. They may want to:
- Stabilize the price-per-share, making it affordable for more shareholders to grab a slice of the pie, or
- Increase funding towards an upcoming capital project, an acquisition, or a merger
When more shares are issued, dilution is at stake. Existing shareholders frown upon it. They receive additional shares but lose voting power.
Low float stocks are less likely to have the effects of dilution.
If you are concerned about dilution, watch for the warning signs. For example, does a company have enough capital to fund its current liabilities? Or is there talk about growth opportunities or new ventures hitting the media?
What Are the Levels of Float in Stock?
Think of it as a form of supply and demand. If the demand is high but there’s not enough to go around, a high stock float occurs. But if there are plenty of resources with no investors around to swoop it up, you have a low stock float.
High Float
When the high float is present, the balloon is expanded, full of air. There are a large number of shares available for trade.
As investors analyze the stock and decide on what to purchase, they also build an exit strategy for the just-in-case scenarios.
For example, in cases of high float, investors are in a stronger position to exit from an investment. They may not make a considerable profit, but traffic is moving. There’s no real risk of getting stopped.
Large companies fall into the high float category, meaning:
- There are 15-million shares or more within their float
- A greater amount of ownership is held by the shareholders versus the company’s leadership teams.
- Gains are more stable, and there is less volatility to be expected
- Stocks are easier to purchase, mainly because they are available and affordable
Medium Float
A medium float represents stock shares between 10 and 15 million and is an all-time favorite for day traders.
These are the in-between shares. They carry an acceptable level of risk and growth.
Low Float
At the bottom of the barrel, low float provides the highest risk. Low float shares represent up to 10 million shares. Long-term investors may shy away from low float stocks, but active traders may welcome them.
Low float stocks should not be disqualified from your stock portfolio. Their values may change more drastically than that of high float stocks, but it could be in your favor if they achieve gains (big or small).
A useful tool to consider with low float stocks is a stock screener. These give investors the upper hand, allowing them to sort through stocks in real-time based on their criteria. It takes a portion of the hassle out of the selection process.
How Do You Find Stock Float?
For starters, don’t expect to go to NASDAQ or the New York Stock Exchange (NYSE) for a stock float. It is not generally disclosed on their websites.
To learn a company’s stock float, you’ll either need to calculate it yourself or visit a third-party service such as MarketWatch or Yahoo Finance.
Is Stock Float the Same as Stock Volume?
Stock float and stock volume are not synonymous, but they both play a vital role in the market.
Here’s why:
Investors often overlook stock volume. It is the number of shares traded over time, compared to stock float, which measures the number of shares available for trade.
Using stock volume with stock float gives investors an insider's look at its trends or patterns. Trends can signal to investors whether or not an uprise or reversal is bound to occur.
Why Is Stock Float Important to Investors?
A few examples of investor classifications include:
- Day traders
- Long-term investors
- Commodities futures traders
- Saver
Each type of investor is interested in stock float in their own way. They each have their investment preferences and financial goals to meet.
Stock float is essential to every investor, though. Everyone needs to know what is available on the market to plan their next steps in growing investment portfolios.
Trading Stock Based on Float
There are many different methods and strategies investors use to boost their portfolios.
Here are a few tips when basing it on the float:
- Set-aside time and ground yourself with the available stocks.
- Follow volume and float together, especially after a news broadcast
- Check the trends. Are the low float stocks holding changing in value throughout the day?
The Bottom Line
Both new investors and seasoned ones should be familiar with the float in stocks. It is an important concept that influences investment decisions and portfolio growth.
Is there an answer to the question, “What is a good stock float?” Of course, there is, but it is determined by your investment goals and comfort level, no one else’s.
High, medium, or low all share their pros and cons. Take the time and research to determine which best fits your portfolio.
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Sources:
Floating Stock - Overview, Formula, Features, Limitations | CFI Education
Floating stock: Why it's important for investors to know a company's float | Business Insider