There are multiple meanings for “float” when referring to stock. The term “float” describes the total number of shares that are open to the public and can be purchased. The second term an investor may hear is “floating a stock,” which refers to the action of listing a company’s shares on a stock market so that the general public can buy them. Thus, to “float” stock is to issue it publicly through an IPO.
In this detailed guide, you’ll learn what a stock float implies for your portfolio.
List of Contents
What Is Stock float? & How Does It Work?
The term “stock float” refers to the number of publicly traded shares. There are two common ways to describe this: either as a complex number, like 10 million shares or as a percentage of the total number of shares in circulation.
Consider a business with 100,000,000 outstanding shares but 75,000,000,000 shares being freely tradeable. That amounts to 75,000,000 shares or 75% of the total number of shares issued and outstanding.
This begs the question: what, if anything, may be left out of a stock’s float?
- Internally held shares
- On-balance-sheet shares, like Treasury stock, are held by a firm rather than a third party.
- Shares of stock that the owner cannot sell for a specified period
In a nutshell, the float may be reduced or eliminated if any shares are not freely tradeable.
However, there may be more nuanced aspects to what constitutes a floated company, and investors may choose to change their float-down estimates accordingly.
- Generally speaking, if an investor owns more than 5 percent of a company’s outstanding shares, the company must submit a quarterly report to the Securities and Exchange Commission.
- A major long-term investor or an insider who has held the stock and has no plans to sell it
Specific figures are based on the assumption that these investors, like insiders with restricted stock, will not sell their shares until they publicly disclose the sales. Therefore, investors may conclude that, at least shortly, they cannot gain access to these shares.
The Significance of Stock Floats to Investors
The float is essential to investors because it reveals the total number of shares that can be traded in the market. Information like this is beneficial before and during extreme events like a short squeeze. Additionally, it is helpful since it reveals the company’s ownership structure and provides insight into how the business might move forward in the event of a future capital raising.
Stocks having a lower float than average will be more volatile than those with a higher float in the short run because of the limited issuance. The price of a stock may rise if demand exceeds supply and the stock is difficult to obtain. There is an inverse dynamic at work here as well. As a result, the stock price may fall dramatically if demand for the shares suddenly evaporates.
Short sellers in 2021 attempted to buy up as much GameStop stock as possible, which inflated the stock price. Before the squeeze, GameStop had decreased the float by repurchasing its stock for about a year. While this was happening, numerous investors were selling short or betting that the stock would fall. At some time, the combination of a small float and a large number of short-sellers created a situation in which the shorts had to acquire a more significant number of shares than were available in the float, contributing to a price increase through a process known as “squeezing.”
Second, the composition of the company’s shareholders may provide insight into how the financial backers may respond to upcoming developments. A high public float, for instance, could suggest that shareholders are more likely to approve a purchase at a premium price. However, a distinct reaction to investor ideas or shareholder votes may be indicated by a high level of insider ownership. Possibilities for long-term success are enhanced when insiders possess a large percentage of the company’s shares, as opposed to outsiders wanting to cash in quickly.
Lastly, a business can generate money through the stock market by selling its Treasury stock (which it may have acquired through a stock repurchase). There’s a chance it can increase its capital without issuing any new shares. These shares are now part of the float and will be considered outstanding.
Stock Float: High vs. Low
Rarely does a firm sell all of its stock in an initial public offering (IPO); instead, it may sell only a tiny fraction of its existing shares, with the majority of the shares still being held by insiders and possibly being subject to restrictions. For instance, Robinhood floated around 7% of its stock in its first public offering.
One or more of the following are some of the most frequent causes of a decrease in float size:
- To avoid flooding the market with unsold stock, the IPO’s underwriters will likely only offer a small percentage of the company’s total shares for public sale.
- Some insiders may be unable to or may choose not to sell all of their shares during the IPO.
- It’s possible that an IPO with a lower float could benefit the stock more than one with a higher float, as it might attract a more enthusiastic group of investors.
Remember that a stock’s initial public offering (IPO) price might serve as a psychological floor, keeping it stable for a more extended period if it’s set relatively high.
Float vs. Authorized Shares vs. Outstanding Shares
Stock in a corporation can be broken down into several different groups depending on the following factors:
Authorized Shares
According to its charter, a corporation may issue just the number of authorized shares. Simply put, authorized shares allow the corporation to sell the stock if and when it becomes necessary. Even if the corporation has many authorized shares, it may never issue them. The corporation is doing its shareholders a service by limiting the total number of shares that can be issued.
Outstanding Shares
Several outstanding shares represent a total number of shares. All publicly traded and privately distributed shares are counted here.
Float
A stock’s “float” is the total number of shares that anyone can buy and sell in the market. For example, any restricted shares that employees may have been excluded. However, if company insiders sell shares in the open market, such shares will be included in the float.
To restate this another way, the total number of authorized shares is always more than the sum of the outstanding shares and the float.
Conclusion
Depending on the circumstances and time frame, the stock float may be a key metric for investors to keep an eye on. Long-term stock performance is instead typically determined by the company’s fundamentals. Ben Graham famously said, “A market is a voting machine in the short run, but a weighing machine in the long run.”
FAQs
Stock float refers to the number of shares of a company’s stock that are available for public trading. These shares are not held by insiders and can be bought and sold freely on the open market, which can affect the liquidity and volatility of the stock.
For example, if a company has issued a total of 10 million shares of stock, and 2 million shares are held by insiders and cannot be traded on the open market, then the floating stock would be 8 million shares. These 8 million shares would be available for trading among investors and would be used to determine the stock’s market capitalization and other key financial metrics.
A company’s stock float can change over time due to various market conditions such as stock splits, resales, and secondary offerings.
Although a low stock float is sometimes a good choice for investors, it can come with the risk of price manipulation and fluctuations. However, before buying such stocks, ensure to understand the risks involved.
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Read more: Stocks
Source: Bankrate