Example calculation of floating shares
As noted above, the number of shares outstanding does not always represent the number of shares floating. A company’s float is calculated by subtracting shares outstanding (shares owned by institutions, management, and ESPOs) and restricted from shares outstanding.
For example, a company may have 10 million shares outstanding. However, of the 10 million shares, 5 million are owned by some large institutions, management owns 1 million shares, and 500,000 shares are contributed to ESPO (employee stock ownership plan).
Therefore, the floating stock is 3.5 million (10 million – 5 million – 1 million – 0.5 million). As a percentage of the outstanding stock, the floating stock will be 35% (3.5 million divided by 10 million = 0.35 multiplied by 100).
Low vs. High Float Stock
Since the float is the number of shares available for public trading, it is prone to fluctuations over time and is influenced by various conditions. Generally classified as high and low, knowing the size of the float will illuminate the volatility and liquidity of the stock.
High floating stock
A stock float is considered high if you have a large number of shares available for trading, typically with more than 15 million shares within your float. A high stock float is often seen in larger companies.
Due to many actions on the float, its liquidity can absorb large movements. The lack of scarcity means that the value is often balanced by the number of shares being traded. Since it takes more effort to move the price, stocks with a high float tend to be more predictable and less volatile.
As stable and predictable stocks, high-float stocks are preferred by investors seeking long-term, stable growth without an increased risk of significant losses in a single session.
Advantages of High Float Stocks for Investors:
Most of the stocks in the high float category are large companies with a large number of shares so that the price per share is affordable for the average investor. Additionally, many of these companies are titans in their industry with long histories of dominance within their respective markets. Investing in a long-standing successful company is of course a much safer bet; excellent for investors looking for stable and consistent growth; Insiders will rarely own more than 50% of a free float, which means that the votes of major shareholders in free float companies generally align with what the investment community wants to see, as they own the majority of the company’s shares. .
Cons of high free float stocks for investors:
Due to the quiet nature of high-float stocks, there is less potential for short-term breakthrough gains; low internal property can also be seen as a drawback. If company members don’t want to put their money in the game, it’s worth considering whether you should. So when investing in high free float stocks, be sure to look for well-established companies; Given that high free float companies have at least 15 million shares available on the open market, to have real voting power as a singular investor, you would have to own a significant portion of that multi-million dollar float.
Low floating stock
As the name suggests, low float shares indicate that the number of shares available for public trading is low, typically with fewer than 10 million shares freely available. This may be the result of having a substantial number of restricted or limited ownership shares or having few investors. For such stocks, average daily volume tends to be low, leading to volatility and, as a result, wide bid and ask prices.
Before the company dilutes its value by putting more shares on the market, the lower float, at first, can cause the share price to skyrocket as long as there is demand. For stocks floating this low, a relentless rally creates demand. In other words, investors rush to buy shares when they are scarce, which drives up the price dramatically.
Due to the large fluctuations in value, low-float stocks tend to attract day traders. They can be very lucrative in the short term, but they can also cause headaches due to their extraordinarily volatile and fast-paced nature.
Advantages of low-float stocks for investors:
Due to the highly volatile nature of low-float stocks, there is ample opportunity to see dramatic short-term gains; Although not always the case, low-float stocks have low floats because insiders have bought a large percentage of the outstanding shares. High-level internal ownership indicates that the company’s management is very confident that the company is moving in the right direction; Low float stocks have a limited supply of shares available. Therefore, even the slightest bit of news can trigger a surge in demand leading to a dramatic rise in the stock price.
Cons of Low Float Stocks for Investors:
High levels of volatility can also be expressed as a huge downside. Just as it presents an opportunity for windfall profits, the losses can be equally significant. A definite no-go for a risk-averse investor; Low-float stocks tend to represent lesser-known companies. While there is a chance that the next Apple (NASDAQ: AAPL) may be here, these businesses often present more questions than answers, making additional research essential in your decision-making process; Sometimes low-float stocks with high demand will skyrocket. However, a more likely scenario is that these lesser-known stocks are not in high demand, making the acquired stock much more difficult to sell.
Low Float Stock Assessment
Some things worth considering when considering investing in low-float stocks:
Relative Volume (RVOL) : Relative Volume shows the current trading volume of the company’s stock compared to previous volumes. This indicator is critical for investors because it can affect the liquidity of the stock. Low liquidity means investors are potentially stuck with stocks they can’t sell. News Catalysts : Positive or negative news can have a huge impact on a low floating stock value. Keep an eye on stock market and corporate news to predict which stocks are likely to make moves. A news event can cause a low floating stock to change by 50% to 200% in a single day, as they are in short supply. floating percentage: This is the percentage of the total shares available for trading. Each merchant has their specific preference, but most seek a rate between 10 and 25%. Worth considering: how small the stock float is and for how long, the reasons why it’s low, and whether there was a reverse stock split (merging of shares to form a smaller number of proportionately valuable shares).
floatation vs. authorized actions vs. Outstanding Shares: Key Differences
A company’s stock can be organized into three different classifications depending on its status:
Outstanding shares are the total number of shares a company has issued. This includes closely held and restricted shares and those available for public trading. Authorized shares are the maximum number of shares a company can legally issue. It includes shares that have already been published, as well as shares that have management approval but have not yet been released to the trading market. The authorized share count is set when the company is created. The float indicates how many shares are available to the general investing public for trading. It excludes any restricted or closely held shares.
In conclusion
In short, a share float is the total number of shares available for the investing public to buy and sell. Company float is an excellent measure of potential risk and reward as well as ownership structure, all of which are of great importance to an investor.
