In the world of stock trading, one concept that often comes up is floating stock. While it may seem like a technical term, understanding what floating stock is can help both novice and seasoned investors make more informed decisions. Floating stock refers to the number of shares available for public trading, and it can have a significant impact on a stock’s liquidity, volatility, and overall performance in the market.
But why is floating stock so important? In this article, we’ll explore what floating stock is, how it’s calculated, and why it plays a crucial role in the stock market.
What Is Floating Stock?
At its core, floating stock represents the number of shares of a company that are available for trading in the open market. These shares are not held by insiders, employees, or major shareholders; instead, they are accessible to public investors. The floating stock figure is derived by subtracting restricted shares and closely-held shares from a company’s total outstanding shares.
This available pool of shares can fluctuate based on various factors, making it an essential element for investors to consider when assessing the liquidity and volatility of a stock.
How Floating Stock Is Calculated
Calculating floating stock involves subtracting restricted and closely-held shares from the total outstanding shares of a company. Here’s a step-by-step breakdown:
- Total Outstanding Shares: This is the total number of shares issued by a company, including shares held by insiders, institutions, and public investors.
- Restricted Shares: These are shares owned by insiders or those under specific legal restrictions that prevent them from being traded freely.
- Closely-Held Shares: These shares are owned by insiders, employees, or major shareholders, typically not available for trading.
Formula:
Total Outstanding Shares – Restricted Shares – Closely-Held Shares = Floating Stock
For example, if a company has 50 million outstanding shares, of which 42 million are held by insiders or institutions, the floating stock would be 8 million shares.
Types of Shares Affecting Floating Stock
Closely-Held Shares
Closely-held shares are owned by insiders, such as the company’s executives, employees, or large shareholders. These shares are often long-term investments, making them unavailable for regular trading in the public market.
Restricted Stock
Restricted stock refers to shares that are not yet available for public trading due to legal or contractual obligations. For instance, after an initial public offering (IPO), there is often a “lock-up” period during which insiders are restricted from selling their shares.
Low Float vs. High Float Stocks
One of the most significant factors affecting a stock’s volatility and liquidity is whether it has a low or high float:
- Low Float Stocks: These stocks have a small number of shares available for public trading. As a result, they tend to be more volatile, with price swings being more dramatic due to lower liquidity. Investors may find it harder to enter or exit positions in these stocks, leading to larger bid-ask spreads.
- High Float Stocks: Stocks with a large float have more shares available for trading, making them less volatile and easier to trade. High float stocks usually have tighter bid-ask spreads and are more appealing to institutional investors due to better liquidity.
Why Does Floating Stock Change Over Time?
Floating stock is not a static number. It can increase or decrease based on several factors:
- Stock Issuances: When a company issues new shares, the number of shares available for public trading increases, thus raising the floating stock.
- Buybacks: If a company buys back its own shares, the total outstanding shares decrease, which in turn lowers the floating stock.
- Release of Restricted Shares: Shares previously restricted may become available for public trading after the expiration of a lock-up period, increasing the float.
The Impact of a Small Float on Stock Volatility
When a stock has a small float, it typically becomes more volatile. With fewer shares available for trading, supply and demand imbalances can have a more significant effect on the stock price. Small float stocks are often subject to wider price swings, which can either work for or against an investor, depending on market conditions.
For example, if there’s sudden high demand for a stock with limited float, the price may skyrocket due to scarcity. However, if the demand drops, the price can plunge just as quickly.
How Floating Stock Impacts Liquidity
Liquidity is the ease with which investors can buy or sell shares without causing a significant impact on the stock’s price. A stock with a larger float typically has higher liquidity, meaning it’s easier for traders to execute transactions.
Conversely, low float stocks are often illiquid, making it challenging to find buyers or sellers. This lower liquidity can lead to broader bid-ask spreads and may cause larger price jumps when significant trades are made.
The Role of Institutional Investors in Floating Stock
Institutional investors, such as mutual funds or pension funds, usually prefer to invest in companies with high float because they can buy and sell large quantities of stock without affecting the price significantly. Low float stocks, on the other hand, can experience price fluctuations if an institution makes a large trade, leading to potential volatility.
Stock Buybacks and Their Effect on Floating Stock
When a company conducts a stock buyback, it repurchases its own shares, reducing the number of outstanding shares and, in turn, decreasing the floating stock. This can often result in increased volatility, as there are fewer shares available for trading, making each share more valuable.
Floating Stock and the Secondary Market
Floating stock is mainly impacted by transactions occurring in the secondary market, where investors buy and sell shares. A company itself doesn’t control these transactions, but they can influence the stock’s float through actions like issuing new shares or buybacks.
The buying and selling of shares in the secondary market do not change the floating stock, as these transactions simply redistribute the shares among investors.
Examples of Floating Stock in Action
A well-known example is General Electric (GE). In 2023, GE had around 1.088 billion shares outstanding, with about 260 million shares available as floating stock. The remaining shares were held by institutions and insiders, making them unavailable for public trading.
Is Floating Stock Good or Bad for Investors?
Floating stock isn’t inherently good or bad, but understanding it is crucial for making informed investment decisions. Stocks with a low float can be riskier due to their high volatility, while stocks with a high float offer more liquidity, making it easier for investors to enter and exit positions.
Understanding Stock Flotation
Stock flotation refers to a company issuing new shares to the public. This is often done to raise capital. A stock flotation increases the number of shares available for public trading, thus increasing the floating stock.
Floating vs. Non-Floating Shares
The key difference between floating and non-floating shares is their availability for public trading. Floating shares are accessible to the general investing public, while non-floating shares are held by insiders and are not available for public trading.
Conclusion
Floating stock plays a vital role in determining a stock’s liquidity, volatility, and overall market performance. By understanding how floating stock works, investors can better assess the risks and opportunities associated with different stocks. Whether you prefer high liquidity or are willing to take on more risk with low float stocks, knowing the float can give you a significant edge in making informed decisions.
FAQs
- What affects the number of floating shares?
The number of floating shares is affected by stock issuances, buybacks, and the release of restricted shares. - Why are low float stocks riskier?
Low float stocks are riskier because they tend to be more volatile and less liquid, making them harder to trade. - Can institutional investors influence floating stock?
While institutional investors can’t directly change the float, their buying and selling activities can impact a stock’s price and liquidity. - What happens to floating stock during a buyback?
A stock buyback reduces the total number of outstanding shares, which in turn decreases the floating stock. - Does a stock split affect floating stock?
Yes, a stock split increases the floating stock by making more shares available for public trading.
