One of the key things that traders often look for when slicing and dicing market data is the stock float. Stock float refers to the number of listed shares of a particular company that are available for trading to the general investing public.
Public companies are made up of insider-held shares and institutionally owned shares as well as freely tradable shares. The stock market does not necessarily pay much attention on institutionally owned shares and insider-held shares because they are illiquid.
Calculating The Float
To determine the amount of available stock float that a company has, you simply subtract insider-owned shares and institutionally owned shares from total outstanding shares. For example: if the total outstanding shares of Company XYZ Inc. are 90 million, and 30 million are insider and institutionally-owned shares, then float stock is the remaining 60 million shares (90 million – 30 million = 60 million).
High Stock Float
A high float stock is one whose number of freely tradable shares is high. High float stocks are more predictable than low float stocks, because their liquidity can sponge up any huge moves. As such, many traders usually prefer to put their money on high float stocks than on low float stocks.
A company’s stock float can go up if insiders and institutions open up their locked up shares. Employees could vote to exercise their stock options, cashing in on growth to pay for an early retirement, a new home or a car.
Or a company may decide to sell its shares in a secondary initial public offering to raise cash for a merger or acquisition. It can also choose to raise the number of shares through dilution, in order to fund an ambitious new project or get out of a particularly dire financial situation.
Low float stocks are those with relatively low number of shares that common shareholders. Fewer shares are available to trade on the stock market when the float is low, and that can have a significant impact on the price of a stock.
Low float stocks are more volatile than large float stocks. They also have wider bid-ask spread and limited liquidity. Investors consider them as very risky to hold since they can make dramatic moves.
However, traders want a low float to create a more volatile and reactive stock when a company makes its debut on the stock market. When news of a development breakthrough and big research hits the headlines and every trader wants in, the stock becomes more volatile due to less supply.
This is one of the many positive aspects of low float stocks since investors are able to see substantial movements, unlike when betting on high float stocks such as Amazon.com Inc. or Apple Inc.
If the firm behind a low float stock has a newsworthy event, the impact on demand and supply can be significant as only a few shares are available to trade. In other words, low float stocks are prone to organized short and distort campaigns because news can drive their prices.
On top of this, low float stocks are generally micro caps, which makes them riskier for traders that may be considering holding them a long period of time. However, if a low float stock has a positive catalyst, it is possible for it to make a huge move to the upside quickly, hence great return in trading them.
When trading a low float stock, it is important to look for liquidity since you don’t want to hold shares that you can’t sell. Nonetheless, there tends to be a lot of liquidity in low float stocks with good trading opportunities when positive news hits the press.
For extremely very low floats to make explosive moves, they don’t even need high short interest. Low float stock means that short sellers often do not have sufficient access to borrowable shares. As such they are not often able to take the bearish side of a trade when a stock starts to move up.
The combo of less supply for short sellers and high demand from momentum traders can trigger some explosive short term swings in share prices.
When putting your money on shares of a given company, remember to take note of both the available stock float as well as the number of outstanding shares. If the stock float is low and insiders own majority of the stocks, common shareholders could get badly hurt in the event of a sell-off.
Conversely, if the stock float is high or almost equal to the outstanding shares, it may be a sign that insiders of the company aren’t fully committed to raising the stock’s price. However, this scenario may trim down the fear of huge insider trades that could have a negative impact on the price of the stock.