What is float in stocks?

Stock float definition

Stock float refers to the number of shares a company has publicly available for trading, excluding restricted or closely-held stock owned by management, employees, or major shareholders. It essentially represents the portion of a company’s shares that can be freely bought or sold on the open market by the general public.

Unlike shares outstanding, which is the total number of both publicly traded and restricted shares, floating stock only represents shares that a company has publicly available for trading. For example, if a company has 500 million outstanding shares but only 250 million are available to the public, its float is 250 million or 50% of its total outstanding shares.

Importance of stock float

Why stock float is important to investors

Stock float is important because it can have a major impact on a stock’s liquidity and volatility. Knowing whether a stock has a high or low float can help investors decide whether it’s more suited for long-term or short-term strategies.

Floating stock can also reveal how much of a company’s shares are held by insiders, such as executives and early investors. Theoretically, high levels of insider ownership suggest that a company’s leadership is confident about its future.

The significance of high float vs. low float

High float stocks

High float stocks are those that have more shares available for public trading. With so many shares in circulation, demand for these stocks tends to be more subdued, resulting in higher liquidity and more stable pricing. This makes it easier for investors to buy and sell without causing major price swings.

For that reason, high float stocks are favoured by institutional investors, like mutual funds and pension funds, who can execute large trades without disrupting the markets. Their stability also makes them a good option for long-term investors looking for steady and predictable growth.

Low float stocks

Low float stocks have fewer shares available for trading, making them less liquid and more volatile. This means they can be too risky for institutions and long-term investors, but ideal for short-term traders looking to capitalise on quick price moves.

Because they’re less liquid, low float stocks tend to have a wider bid-ask spread compared to similar high float stocks. Before diving into low float stocks, investors should check trading volumes, recent company news and actions (like stock buybacks or reverse splits), and float percentages.

There isn’t a set amount for a high or low float, but generally, stocks with less than 10 million freely tradable shares are considered to have a low float size. The lower the float, the greater the potential for price swings, and the more unpredictable the trading experience.

How to find the float of a stock

You can find a company’s stock float on third party websites or calculate it yourself using a simple formula.

Major exchanges like the Nasdaq or New York Stock Exchange (NYSE) don’t generally list a company’s float information. However, you can find float stock data on websites like:

• MarketWatch
• Yahoo Finance
• Morningstar
• Bloomberg.

You can also calculate floating stock yourself using this formula:

Floating Stock = Outstanding Shares - Restricted Shares - Closely Held Shares (Insider + Institutional Ownership)

Where:

• Outstanding shares are the total number of shares a company has issued
• Restricted shares are those that can’t be traded due to legal or contractual restrictions, such as lock-up periods after an IPO
• Closely held shares are shares owned by company executives, insiders, or major institutional investors.

For example, imagine a company with 10 million outstanding shares. 7 million are owned by large institutions, 1 million are held by management, and 0.6 million are part of an Employee Stock Ownership Plan (ESOP).

To calculate the floating stock:

10 Million - (7M + 1M + 0.6M) = 1.4M shares

The float percentage would be (1.4M / 10M) x 100 = 14%

This means only 14% of the company’s stock is available for public trading, suggesting a low float stock.

Relationship between stock float and market performance

How stock float affects stock prices

Stock float can have a dramatic effect on stock prices. Because stock prices are dictated by supply and demand, the number of shares available for trading will naturally affect a stock’s price stability and volatility.

Stocks with low float have fewer shares available for trading, which makes them more volatile. If demand increases, the stock’s price can rise quickly. However, the same is true in reverse: a sell-off can cause sharp declines.

On the other hand, high float stocks have more shares available for trading, which makes them more stable. With a larger supply of shares in circulation, it takes more buying or selling pressure to create big price swings. This is why they’re preferred by institutional investors.

Examples of stock float impact on market performance

Here’s an example of how stock float can impact market performance:

Beyond Meat (BYND) went public in May 2019, with stocks reaching $235 within a few months. The company had a very low float at the time of its IPO, leading to extreme volatility as demand for shares exceeded supply.

In October, Beyond Meat’s lock-up period ended and insiders could sell their shares. Before the lock-up expiration, BYND was trading at around $105 per share. The day the lock-up expired, BYND’s float increased dramatically and prices dropped by 22%. Within weeks, BYND’s stock had fallen below $75 – a 70% decline from its all-time high earlier that year.

Factors influencing stock float

Stock float can change over time based on internal company decisions and external market forces.

Internal factors

Internal factors influencing stock float include:

• Insider holdings: The number of shares held by company insiders, such as executives, board members, and employees, directly affect the float size. Since these shares are often restricted and not publicly traded, they reduce the number of shares available in the market. If an insider decides to sell their shares, the float increases.
• Institutional holdings: Large investment firms, like mutual funds and hedge funds, often hold significant portions of a company’s stock. Although these shares aren’t technically restricted, they can still influence the float since institutions trade less frequently than retail investors, effectively reducing the available float. If institutional investors sell a large number of shares, the float increases.
• Restricted shares & lock-up periods: Companies may issue restricted stock to employees or private investors. These shares can’t be sold until the lock-up period expires, which temporarily keeps them out of the public float. Once the lock-up period ends, these shares become available for trading and the float increases.
• Stock buybacks: When a company repurchases its own shares, the number of outstanding shares decreases. If the buyback involves shares previously part of the float, the float shrinks.
• Stock splits & dividends: Stock splits increase the number of outstanding shares while maintaining the same total market capitalisation, which means the float expands proportionally. Companies that issue stock dividends instead of cash also increase the number of shares in circulation, and therefore the float.

External factors

External factors that can influence stock float include:

• Market conditions & investor sentiment: A bullish market with high trading volumes can indirectly increase the perceived float as more investors actively trade shares. During bearish market conditions, investors may hold onto shares, reducing liquidity and effectively lowering the float.
• Regulatory changes: Government regulations, like new rules on institutional ownership limits, can lead to changes in how shares are held or traded, impacting float size. Tax policies and corporate governance reforms can also influence whether companies choose to issue or buy back shares, which can indirectly affect the float.

How to analyze stock float data

Key components of stock float data

A company’s stock is made up of three key components:

• Authorised shares: These are the maximum number of shares a company could issue according to its corporate charter. Authorised shares provide flexibility by allowing companies to sell additional stock if they need to raise capital in the future. Some companies might authorise a huge number of shares but have no intention of issuing all of them.
• Outstanding shares: This refers to the total number of shares that have been issued and are currently held by all shareholders, including public investors, company insiders, and institutional investors. Outstanding shares include both freely traded and restricted shares.
• Floating stock (float): The float represents the number of shares available for public trading, excluding restricted or closely held shares.

Common errors when analyzing stock float

Confusing shares outstanding with floating stock

One common error comes from misunderstanding the relationship between floating stock and outstanding shares.

Some investors can look at a high number of outstanding shares and think it automatically equals high liquidity, but that’s not necessarily the case. Liquidity will always depend on the float. Even if a company has a huge number of outstanding shares, if most of those shares are held by insiders or institutional investors, liquidity will be minimal.

To avoid this mistake, be sure to always check how many shares are freely available rather than relying only on total shares outstanding.

Misinterpreting changes in float

Another common mistake is assuming that any increase in float is negative and any decrease is positive, but that’s not always true.

While an increase in float size due to insider selling or secondary offerings can put downward pressure on stock prices, it’s not always a negative thing. For example, secondary offerings might be used to fund acquisitions or reduce debt, which can improve a company’s value in the long term.

On the other hand, many investors look at share buybacks as a positive since they boost stock prices. However, it could also indicate that a company lacks better reinvestment opportunities, which can be detrimental to future growth.

When analyzing stock data, be sure to consider the context behind float changes to get the bigger picture.

The role of stock float in trading strategies

How to use stock float in trading

Stock float can be used to gauge a stock’s liquidity and volatility when trading. Low float stocks tend to be more volatile, making them ideal for day traders looking for short-term price swings. High-float stocks, on the other hand, provide more stability and liquidity, making them suitable for long-term buy-and-hold strategies.

Examples of trading strategies based on stock float

Some day trading strategies that use low float stocks include:

• Momentum trading: This involves seeking out low-float stocks experiencing a sudden surge in buying interest (e.g. due to positive news or earnings surprises). Since fewer shares are available for trading, even small increases in demand can drive prices up quickly.
• Short squeeze: This involves targeting low-float stocks with high short interest. If lots of investors are betting against a stock (shorting it) and its price starts rising, short sellers may be forced to buy back shares to cover their positions, further driving up prices.
• Breakout trading: This involves watching for low-float stocks that are trading with a tight price range and setting alerts for breakouts above key resistance levels. Once the stock breaks out, the trader enters and rides the momentum for short-term gains. Because low float stocks have fewer shares available, a breakout can lead to exaggerated price movements.