The stock market proves to be a profitable hub for investors as it serves as a gateway to enable many to reach their financial goals. However, it is important to note that there are high risks involved when choosing to invest in stocks. While several measures have been necessitated for traders to put in place in order to hedge against these risks, it is crucial to research a company and its stock carefully before deciding.
One of the essential pieces of information an investor must gather about a stock before venturing into it is the “float” of the company’s stock. The float of a company’s stock tells you how many shares of a public company are available for trading, hence an important knowledge needed to make good investment decisions.
Here is a detailed guide on all that floating stocks entail and their relevance in the stock market.
Floating Stock Defined
Floating stock is basically defined as the number of shares that are tradeable to the public out of a company’s stock. Oftentimes, floating stocks serve as a major determinant of what the stock of a company can be worth.
Notably, when a company has a limited number of floating stock, it implies that there aren’t many shares available for the company to sell to the public. Hence, stocks with a limited number of shares are known as low-floating stocks.
It is often harder to find people to buy or sell low-floating stocks as they are prone to making a stock more volatile. Consequently, this can result in reduced trading operations on the company’s stock due to the bigger price difference caused. In simple terms, it’s like having fewer seats available on a bus, making it tougher to get on or off.
However, the exciting part of this is that a company’s stock cannot always remain at a low float, as the company itself has great power to influence change in its floating stock. This is because if a company is able to issue more shares, there can be more floating stocks available, and if they buy back shares, there are fewer.
Understanding Floating Stock
First, a company is launched into the stock market after concluding certain funding rounds like the initial public offering. This launch approves that the stock of the company has become tradeable to the public.
After the company goes live, the funds generated are pumped into the market and they become shares open to be acquired by anyone. However, the amount of shares acquired by different investors, like individuals, big institutions, and others, is what causes the decrease in the company’s tradable shares. What’s left, which is not held by these investors, is the floating stock.
For a better understanding, let us assume that a company has a total of 100 million shares available, but not all of them are free to trade. Big institutions own 65 billion of these shares, the insiders of the company have 10 billion, and 5 billion shares are entitled to an employee stock plan. So, only 15 billion shares (100 billion minus 80 billion) can be freely traded, which is around 20% of the company’s initial number of shares.
It is noteworthy that the 15 billion worth of freely tradable shares which is the company’s floating stock can change and become higher. To achieve this, the company has to create and sell more shares to get money, thereby increasing the number of tradable shares. But if they decide to buy back shares, there will be fewer shares available to trade. Moreover, if there are very few floating shares, even a small amount of trading can cause the stock’s price to go up or down a lot, making it risky for investors.
High Float and Low Float
As mentioned earlier, floating stocks are prone to changes. These changes which can either be an increase or decrease in its amount can be influenced or natural. Hence, when these stocks change, they fall into two categories which are known as high float and low float.
The number of floating shares is prone to change even when they are not expected to. If a company creates new shares to get money, the float goes up. If insiders or big shareholders buy or sell shares, it can also change. While changes in floating stocks can be influenced by different factors, let’s discuss the two forms of float.
- High float. This means there are lots of shares that are sellable to the public out of a company’s stock. For example, Samsung Electronics Co., Ltd. has a high float because most of its stock can be traded easily. This is good for investors since they can buy and sell the majority of the company’s stock without much trouble. Big investors like mutual funds and insurance companies are usually fascinated by high-float stocks because they can buy a lot without affecting the price much.
- Low float. Contrary to high float, low float of stocks implies that only a small portion of shares can be traded by the public. The common reason behind a situation like this is that many shares are held by insiders or not available for trading. These shares become scarce and difficult to get because there are only a few shares available for the public to trade, hence it might not attract many investors.
Since floating stock is not the same as all the shares a company has, the value of a company’s floating stock has to be calculated with the following terms in consideration.
The formula for calculating a company’s floating stock is provided below:
Floating Stock = Total Shares – Restricted Shares – Institution-owned Shares – ESOPs
Total shares are all the shares that are issued by the company, restricted shares are shares that are not open for trade to the public until a specific time, and ESOPs are shares given to employees, which they can only sell after a certain time.
Why Is Floating Stock Important?
Basically, floating stock is vital for investors because it shows how many shares are available for trading. If the float is low, it means there aren’t many shares you can buy or sell. This can make the stock very risky and not easy to trade. Investors might find it hard to get in or out of their positions, and prices could swing a lot, causing losses.
Hence, it is important for investors to know the float of a company’s stock as it helps them to figure out if a stock is easy to trade or not. If a company has more shares available, it’s better for trading and less risky.
Big institutions and financial companies always check the float before investing. They want to avoid stocks with low float because they are hard to trade and have bigger price differences. If they put a lot of money into these stocks, it can affect the price a lot because there aren’t many shares available.
Floating Stock vs Shares Outstanding
Shares outstanding refer to the total amount of shares a company has given to shareholders, except for the ones it bought back. Shares outstanding differ from floating stocks because the latter represents only stocks that are available for the public to buy. Nonetheless, the formula below is used to calculate the amount of outstanding stocks owned by a company.
Outstanding Stock = Total Given Out – Bought Back Stock
Not all these shares of a company are for the public, some are held by people inside the company, like employees and bigwigs, and these make up part of the total shares. Shares outstanding comprise all the shares the company has sold and those possessed by its shareholders. This is different from floating stocks as it includes restricted stocks, meanwhile floating stocks only represent shares filtered for public trade.
Before diving into stock market investments and aiming for profits, it’s crucial to grasp the basics. Now that you understand what floating stock means and its importance, you’re a step closer to getting a detailed understanding of the markets.
No doubt, when you are able to know the floats of a company’s stock, you find yourself in a realm that helps you decide better whether to invest in a particular stock or not.
Generally, when pursuing an investment on a long-term basis, it has been observed that high-float stocks are a better choice. On the other hand, there are chances that low-float stocks have the tendency to yield short-term productivity. Remember, there are barely any investments that are not risky, as such, it is wise to take special time and do personal research on a stock before making further ventures.