What’s floating stock?
A stock’s floating stock is its trading share count. Low-float stocks have few shares. Remove closely held and restricted stock from a company’s total outstanding shares to calculate this stock.
Insiders, significant shareholders, and workers possess closely held shares. Restricted stock is insider shares that cannot be exchanged due to temporary restrictions, such as the lock-up period after an IPO.
Low-float stocks are more volatile than high-float stocks. Because fewer shares are available, buyers and sellers may find it more challenging to discover This leads to higher spreads and reduced volume.
Understanding Floating Stock
A company may have numerous outstanding shares but minimal floating stock. Suppose a company has 50 million shares. The 50 million shares are split between major institutions (35 million), management and insiders (5 million), and the ESOP (2 million). Only 8 million shares (16% of outstanding stock) are floating stock (50 million minus 42 million).
A company’s floated stock might increase or fall. This can happen for several reasons. A company can sell additional shares to raise capital, increasing this stock, and it will rise if restricted or closely held shares become available.
Share repurchases diminish a company’s share count. This lowers the floating share proportion of outstanding stock.
A stock split increases floating shares, whereas a reverse split decreases them.
Why Floating Stock Matters
The float of a firm is crucial for investors as it represents the number of shares available for purchase and sale by the public. Low floats hinder active trading. Investors may struggle to enter or exit limited-float companies due to low trading activity.
Institutional investors dislike smaller float businesses due to less liquidity and higher bid-ask gaps since fewer shares are traded. Instead, institutional investors like mutual funds, pension funds, and insurance firms that acquire vast blocks of shares will invest in companies with a better float. Huge acquisitions in firms with an extended float will not affect share prices as significantly.
Special Considerations
Share trading by the public is the responsibility of the secondary market, not the firm. Investors buying, selling, or shorting shares do not alter the float since they do not change the quantity of shares available for trade. They’re just sharing the redistribution. The creation and selling of stock options do not impact the float.
Example of Floating Stock
GE will have 8.75 billion shares in June 2020. Insiders owned 0.13%. Large institutions owned 63.61%. Thus, 63.7%, or 5.57 billion shares, were likely unavailable for public trade. Hence, 3.18 billion shares (8.75–5.57) are floating.
Note that institutions don’t keep stocks indefinitely. Institutional ownership fluctuates, albeit not necessarily significantly. Institutions may be selling shares if institutional ownership and share prices decline. Increasing institutional ownership indicates share accumulation.
Conclusion
- The number of publicly traded shares is called floating stock.
- Subtract restricted and tightly held shares from a company’s total outstanding shares to determine this stock.
- New shares, purchased back shares, and insider or big shareholder trades will affect floating stock.
- Low-float stocks have higher spreads and volatility.
- Investors may struggle to enter or leave low-floating companies.
