Floating Stocks Definition

What are floating stocks, what does a stock float indicate, and how do you interpret the value correctly? This and more you’ll learn in this article.

Floating Stock: Definition, Example, and Why It’s Important:

  • Floating stock or “the float” refers to the number of shares available for trading of a particular stock.
  • It excludes closely held shares owned by insiders, restricted shares, and locked-up shares after an IPO.
  • A large float allows more liquidity and makes the stock harder to manipulate.

The key point is that the stock float refers specifically to the number of shares actually available for public trading, excluding restricted shares held by insiders or temporarily locked up. A larger float generally means more liquidity for the stock.

Understanding Floating Stock

Floating stock, also called “the float”, refers to the number of shares actually available for trading by the public. It excludes closely held shares owned by insiders, restricted shares, and locked-up shares after an IPO that are not able to be traded freely. The float is an important factor because a large float allows more liquidity and makes the stock harder to manipulate.

Floating Stock vs Other Stock Metrics

While shares outstanding refers to all shares a company has issued, the floating stock is just the portion actually available for public trading. It excludes restricted stock held by insiders or employee compensation plans that cannot be traded. Closely held stock owned by founders, executives, or institutional investors is also excluded from the float.

Calculating Floating Stock

To calculate floating stock, companies take shares outstanding and subtract restricted shares, closely-held shares, and any other locked-up or non-tradable shares. The average daily float is a related metric tracking the average number of shares available each day, which can change as lockup periods expire.

Factors Affecting Floating Stock

The main factors impacting a stock’s float are insider holdings, including shares owned by executives, founders, and employee stock plans, as well as lockup periods after an IPO that temporarily restrict trading of shares. Corporate actions like buybacks or new share issuances can also increase or decrease the float.

Trading Implications of Floating Stock

A stock with a larger floating stock tends to be more liquid, making it easier to buy and sell. The percentage of a stock’s float being shorted called the short interest ratio, also impacts trading. Low floats make stocks easier to manipulate.

IPO Impact on Floating Stock

When a company first goes public through an IPO, the float is initially very low as most shares are held by insiders and underwriters with lockup periods. Over time, as lockup expirations occur, more shares become part of the tradable public float.

Low and High Float Stocks

Low float stocks with a small portion of shares available for trading can be riskier and more volatile but potentially have higher returns.

Yet, this is exactly what day traders are looking for – high volatile stocks traded on exceptionally high volume (number of traded shares).

On the other hand, high float stocks provide more liquidity but less opportunity for big price moves. Fonds managers and long-term investors typically aim to invest in high float stocks.

Float Management Strategies

Managers aim to optimize the ideal float level. Companies use strategies like share buybacks to decrease the float and make the stock less liquid or issue new shares to increase available float. Investor relations teams monitor the ideal public float level to balance liquidity needs with principles’ ability to benefit from price moves.

Alexander Voigt, CEO
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Alexander Voigt is the founder of DayTradingZ, was a regular contributor to Benzinga and has been featured and quoted on leading financial websites such as Investors.com, Capital.com, Business Insider and Forbes.