If you want to trade smartly, it's crucial that you fully comprehend key investment terms. So, in this article I'm going to cover a common question I see; what is a float in stocks?
What is a float in stocks:
Regarding the stock market, a float refers to the number of shares which are currently available to be purchased on the open market.
A stock's float is calculated by subtracting the number of restricted shares and closely held shares which are not made available on the open market from the total number of shares which a stock offers.
Investors refer to stocks as having either low float or high float.
- Low float stocks are typically scarce and harder to purchase and sell
- High float stocks are more readily available and can easily be traded at any given point in time
What are restricted shares and insider shares?
Restricted shares are shares which currently cannot be traded. There are multiple reasons why shares may be classed as restricted shares.
For example, restricted shares may be temporarily unavailable due to the highly regulated lock up period which occurs after a public offering, known as an IPO.
These shares are usually referred to as insider shares.
When it comes to understanding a float in stocks, it's important to factor in the influence of restricted shares on company's float.
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What are closely held shares?
Closely held shares refer to shares which are held by the owners of a company, a company's board of director, its key shareholders, and its employees.
They differ from ordinary shares as they are not traded on the open market & are also a key factor which directly influences a stock's float.
Does the trading of stock on open, secondary markets effect stock float?
No, when shares are purchased and sold on the open market the float of a stock is not affected. As the number of shares which are available to trade does not change.
Only the ownership of individual shares changes when investors buy and trade stock on the open share market.
The number of floating stocks which a company has will change over time:
It's important to remember that the number of floating stocks which a company has will change over time.
There are a few key reasons why a stock's float may increase or decrease:
Firstly, a business' floating stock will increase if new shares are made available.
For example, many businesses make new shares available, to raise further capital to expand their businesses or to get out of a difficult financial situation.
Alternatively, a business' floating stock may increase if they choose to make restricted stock available to the public.
Secondly, companies may choose to instigate buy back plans to purchase back shares, in order to retain more control of their business. In this situation their business' floating stock will decrease.
Lastly, the number of floating stocks which is available can also change if key shareholders decide to sell some of their stocks or to purchase more stocks.
So it's well worth keeping up to date with the number of floating stocks which a company has made available to ascertain whether a company is offering low float stocks or high float stocks. As the benefits and risks of both types of stocks are different.
Are there any advantages of purchase low float stock?
Yes, many day traders who are looking to make a quick profit enjoy picking up low float stocks, as due to the volatile nature of low float stocks their share prices can drastically change in a single day.
For example, experienced day traders are often able to purchase low float stock cheaply before they skyrocket in value before the end of the trading day.
In order to make competitive profits of 10% to 50%. So, there are some upsides to purchasing low float stock.
Are there any disadvantages of purchasing low float stock?
Yes, there are a few disadvantages of choosing to purchase stock which has a low percentage of floating stock.
Firstly, the smaller the number of shares which a company has available for purchase on the open market, the harder it may be to purchase stock at a price point that you're comfortable with.
Furthermore, you may also find it challenging to sell your stock at your desired price point.
Low float stocks and the risk of volatility:
Stocks which have a low float, are also known for being more volatile than stocks which have a high float. This is since they often feature higher spreads and lower volumes which often leads to unpredictability and volatility.
Historically, low float stocks have also been volatile as if a company offers more restricted shares and closely held shares then float. If you purchase low float shares and the owners of restricted shares or closely held shares decide to sell off most shares, the value of your shares may plummet in a single day.
So make sure to complete your due diligence if you choose to purchase low float stocks.
Is it still worth investing in low float stocks?
While there are risks associated with investing in low float stocks, it's still well worth incorporating low float stocks into a diversified investment portfolio.
Especially if you are the type of investor who prefers holding on to stocks in order to benefit from long term gains or are interested in becoming a day trader.
The primary advantages of purchasing high float stocks:
As mentioned previously one of the main advantages of purchasing high float stocks is that you should have no trouble purchasing or selling stocks at a set price.
As the volume of stocks which are available at any given point in time will be relatively high. So if you're looking to decrease your investment portfolio's risk it's a wise idea to purchase high float stocks to add to your portfolio.
If you plan on purchasing low float stocks, just be mindful of the fact that it may be harder to sell your stocks.
If you purchase low float stocks be prepared to hang on to your stocks for the foreseeable future.
Also be sure to have both low float stocks and high float stocks in your stock portfolio.
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