Investing in stocks is a smart way to build your wealth as you set on the journey to become financially free. However, before you do that, you need to be familiar with stock market-related terms, such as float shares.
In the financial world, floating stocks are the stock of a company that is publicly traded. It is the opposite of privately held stock, which a person or entity owns.
What Are Float Shares?
Generally speaking, when you invest in a publicly traded company, what you’re doing is investing in its floating shares, the stocks it sells to fill the needs of public investors — which may include small investors like you in addition to large institutions.
If only 10% to 20% of the shares of a company are available for trading, it is considered a low float. Meanwhile, a company with more than twenty percent of its shares publicly available is said to have a high float.
What Are Outstanding Shares?
Shares outstanding are shares that have been authorized, issued, purchased and held by investors. A company could have excessive shares outstanding but a low float.
Investors have voting rights and represent ownership in the corporation by the person holding the shares.
The number of outstanding shares can change daily due to purchases and sales on the market or corporations making bonus issues, allowing shareholders to buy additional shares of their company at a reduced price per share.
How Does Floating Stock Work?
It’s imperative to understand how floating stock works if you want to invest in it. The float is an important measure because it represents the total number of shares available for trading in the primary market.
A company’s floating stock can increase or decrease with time.
For instance, if an organization sells its shares to raise capital, the floating stock will increase. Similarly, if they make closely-held stock available for general buying, the floating stock rises.
Meanwhile, if a business implements share buyback, the outstanding shares decrease, leading to low floating stock.
Example of Floating Stock
For instance, if a company has 50 million outstanding shares, of which large institutions own 35 million, 5 million by management, and 2 million by employee stock ownership plan, there will be only 8 million in floating stock.
That’s just 16% of the total outstanding shares.
Good To Know
A real-life example of a high float is Apple. The company has a widely traded stock.
In 2021, Apple’s float rate was 99.9%, while the insiders only owned 0.07% of the total shares.
Importance of Floating Stock
Floating stock is important because it shows how many shares can be bought by the general public. If a company has a low float, it can impede active trading and make it hard for investors to enter the stock market.
Institutional investors will often avoid trading in companies with smaller floats because there are fewer shares to trade, thus leading to limited liquidity and wider bid-ask spreads.
Instead, institutional investors — such as mutual funds, pension funds and insurance companies — who buy large stock blocks will look to invest in companies with a larger float. If they invest in companies with a big float, their large purchases will not impact the share price.
What Do Individual Investors Need to Know About Stock Floats?
Individual investors don’t need to bother much about an organization’s stock float if they invest mainly in pooled vehicles, such as ETFs and mutual funds. Similarly, investors who intend on holding stock shares for a long time don’t need to worry about stock floats.
On the flip side, the stock float impacts investors who intend to trade continuously in stock. If a stock has a low float, investors may face liquidity issues when buying or selling their shares.
As a result, they may have to sell their shares at a much lower price while buying at a high price. This phenomenon is called the bid-ask spread and can significantly impact the investor’s profit.
A stock split can also impact the stock float of a company. For instance, in a 2-for-1 split, one share is split into two, increasing the floating shares. Meanwhile, a reverse split reduces the floating shares. Note that the splits do not change the percentage; they merely alter the number of floating stocks.
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- Corporate Finance Institute. "Floating Stock - Overview, Formula, Features, Limitations."
- Yahoo Finance. "Apple Inc. (AAPL) Valuation Measures and Financial Statistics."
- Forbes Alert. 2021. "Why It’s Important for Investors To Know a Company’s Float."
- U.S. Securities and Exchange Commission. "Stock Splits."