In order to trade stocks, there need to be shares available in order to execute a trade. That’s where float comes in. Stock float determines how many shares are available for the general public to trade and invest in. Some stocks have a low float, while others have a high float. Each has its own positives and negatives.
This post will break down stock float, low vs. high float, and more!
What is Stock Float?
Floating stock is the number of shares currently available for trading.
This is calculated by taking the total outstanding shares and subtracting the closely-held and restricted shares. This means you are subtracting shares held by insiders/employees and major shareholders. Restricted stock means the shares cannot currently be traded, usually due to the lock-up period following an initial public offering (IPO).
The number of floating shares will change over time for a variety of reasons, including:
- Secondary Offering (New shares issued)
- Shares bought back
- Major shareholders or insiders buying or selling shares
- Stock Split (traditional will increase, while a reverse split decreases)
Low vs. High Float Stocks?
Low float stocks will likely be more volatile than large float stocks, due to the fact that there are fewer shares available to trade, making it harder to buy and sell. Stocks with a float of 10-20 million are considered low float stocks.
Also, there tends to be a lower volume in low float stocks. You may not get the price you’re looking for with low float stocks because it can take longer to find a buyer or seller.
Despite low volume and difficulty of entering and exiting trades, some traders have found low float stocks as a strategy they use. This is because these stocks are likely to have much more volatility and increased volume due to a news catalyst or other event.
Read More: How to Find Low Float Stocks
Authorized Shares vs. Stock Float vs. Shares Outstanding
Authorized shares are the total count of shares a company can issue, usually created at the start of the company. A company does not have to issue all of its authorized shares.
Outstanding shares are all the shares that can be bought and sold (including restricted shares). This varies from the float, which is all of the shares available for the public to trade. The outstanding and float shares can vary greatly in number.
Why is Stock Float Important?
Stock float is important because it shows how many shares are actually available for the public to trade and invest in.
Additionally, understanding how many restricted and insider shares are held can give you an idea of the ownership structure and how much control they have.
Knowing a stock’s float will give you an idea of how many shares are available for trading, as well as an idea of how volatile a stock is. Though low float stocks aren’t as liquid, some day traders use them as part of their strategy since they are much more volatile in nature.
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