Ever wondered what floating stock is and why it matters to investors? In this article, we’ll explain what floating stock is, why it’s important, and how it affects trading. Let’s get into the basics and see why this metric is crucial for making informed investment decisions.
What Is A Floating Stock?
Floating stock is the number of shares available for trading of a particular stock. It’s a crucial metric for investors because it represents the shares that can be freely bought and sold in the market. To calculate floating stock, you subtract closely-held shares and restricted stock from the total outstanding shares of a company.
Key Components
- Closely-Held Shares: These are shares owned by insiders, major shareholders, and employees. They aren’t part of the floating stock because they are not usually traded in the open market.
- Restricted Stock: These are shares that insiders cannot trade due to temporary restrictions, such as the lock-up period following an IPO.
Volatility and Liquidity
A stock with a small float, known as a low float stock, tends to be more volatile. With fewer shares available for trading, it can be harder to find buyers or sellers, resulting in larger spreads and lower trading volumes.
Understanding Floating Stock with an Example
Imagine a company with 50 million shares outstanding. If 35 million shares are held by large institutions, 5 million by management and insiders, and 2 million by employees through an ESOP, the floating stock would be 8 million shares (50 million – 42 million), which is 16% of the total outstanding shares.
Changes in Floating Stock
The amount of floating stock can fluctuate due to various reasons:
- Issuing Additional Shares: This increases the floating stock as more shares become available for trading.
- Share Buybacks: This decreases the floating stock as the company buys back shares, reducing the number of shares available for trading.
- Stock Splits: This increases the floating stock by dividing existing shares into more shares.
- Reverse Stock Splits: This decreases the floating stock by consolidating shares into fewer shares.
All in all, floating stock is a dynamic number that reflects the shares available for public trading. Understanding it helps investors gauge the liquidity and potential volatility of a stock, which is crucial for making informed trading decisions.
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Why Floating Stock Is Important
Floating stock is a crucial figure for investors because it shows how many shares are actually available to be bought and sold by the general public. Here’s why it matters:
Impact on Trading Activity
A low float can be a barrier to active trading. When there are fewer shares available, it can be challenging for investors to find buyers or sellers. This lack of trading activity makes it difficult to enter or exit positions in these stocks, leading to larger bid-ask spreads and higher volatility.
Institutional Investors’ Preferences
Institutional investors, like mutual funds, pension funds, and insurance companies, typically avoid stocks with low floats. They prefer investing in companies with a larger float because:
- Limited Liquidity: Smaller floats mean limited liquidity, making it harder to trade large volumes of shares without affecting the share price.
- Wider Bid-Ask Spreads: Low float stocks often have wider bid-ask spreads, making trades more costly.
When institutional investors buy stocks with a larger float, their large purchases are less likely to significantly impact the share price, making it easier to manage their investments.
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Special Considerations
A company’s float isn’t directly controlled by the company but by the secondary market, where shares are traded. Actions like buying, selling, or shorting shares by investors don’t change the float; they simply redistribute existing shares.
Similarly, the creation and trading of options on a stock do not affect the float. These activities only impact how shares are distributed among investors, not the total number of shares available for trading.
Let’s put it this way, floating stock is vital for understanding a stock’s liquidity and trading potential. Stocks with larger floats are generally more attractive to institutional investors and easier for all investors to trade, while stocks with smaller floats can pose trading challenges due to limited availability and higher volatility.
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Example of Floating Stock
To understand floating stock better, let’s look at a real-world example: General Electric (GE).
General Electric’s Floating Stock
In September of 2023, GE had 1.088 billion shares outstanding. Out of these, 0.20% were held by insiders, and 75.81% were held by large institutions. This means that approximately 76% of GE’s shares, or around 830 million shares, were not available for public trading. Consequently, GE’s floating stock was about 260 million shares (1.088 billion – 830 million).
Institutional Ownership Dynamics
It’s important to note that institutions don’t hold onto stocks forever. The percentage of institutional ownership can change regularly, though typically not by a significant amount. If institutional ownership decreases along with the share price, it could indicate that institutions are selling off their shares. Conversely, increasing institutional ownership suggests that institutions are buying more shares.
This example illustrates how floating stock can change and why it’s a crucial metric for investors. It shows the available shares for public trading and can signal market trends based on institutional behavior.
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Bottom Line
Floating stock represents the shares available for trading in the open market. Understanding it helps investors gauge the liquidity and potential volatility of a stock. Stocks with larger floats are generally easier to trade and attract institutional investors, while those with smaller floats can be more volatile and challenging to trade. Knowing about floating stock is essential for making smart investment choices.
FAQs
Is Floating Stock Good or Bad?
Floating stock isn’t inherently good or bad, but it can influence an investor’s decisions. A company’s floating stock, or the shares available for public trading, affects the stock’s liquidity. Stocks with a smaller float tend to have higher volatility, making them riskier but potentially more rewarding. On the other hand, stocks with a larger float usually have lower volatility, making it easier for investors to enter and exit positions.
What Is Stock Flotation?
Stock flotation occurs when a company issues new shares to the public, typically to raise capital. This process increases the number of shares available for trading. The opposite of stock flotation is a float shrink, which happens when a company buys back its shares, reducing the number of shares available for trading.
What Is the Difference Between Floating and Non-Floating Shares?
Floating shares are available for public trading, while non-floating shares are held by insiders, major shareholders, and employees and are not available for trading. Non-floating shares include restricted stock and closely held shares.
Why Do Institutional Investors Prefer Stocks with Larger Floats?
Institutional investors prefer stocks with larger floats because these stocks offer greater liquidity and stability. Large floats mean more shares are available for trading, which reduces the impact of large transactions on the share price. This makes it easier for institutions to buy and sell large blocks of stock without significantly affecting the market.
How Does Floating Stock Affect a Stock’s Price?
Floating stock can significantly impact a stock’s price. Stocks with a smaller float tend to be more volatile, with prices that can change rapidly due to the limited number of shares available for trading. In contrast, stocks with a larger float tend to have more stable prices because the higher availability of shares makes it easier to absorb large transactions.
Can the Floating Stock of a Company Change?
Yes, the floating stock of a company can change over time. It can increase if the company issues more shares or if restricted shares become available for trading. Conversely, it can decrease if the company buys back shares or if insiders and major shareholders acquire more shares, reducing the number available for public trading.
Disclaimer: Important information