What Does Float Mean In Stocks?

What does float mean in stocks? A stock float can signify a variety of various things, depending on the context in which it is used. First, a stock float is the number of shares that are publicly traded. Second, when investors talk about “floating a stock,” they imply the process of putting a company on an exchange so that the general public can purchase shares. As a result, to “float” stock is to make it available to the general public through an IPO.

A stock float and what it entails for investors are explained below.

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What Does Float Mean In Stocks?

Float is simply the number of shares that are available to trade. It’s calculated by subtracting the number of shares that are locked up in restrictions from the total number of outstanding shares. The term “float” can also refer to the act of selling shares that one doesn’t own yet, in hopes of buying them back at a lower price to profit from the difference. The vast majority of stocks have what’s called a “free float.” That means there aren’t many restrictions on the shares and they can be easily traded.

A company with a small free float may be difficult to trade because there aren’t many willing buyers or sellers at any given time. Restricted stock, on the other hand, shares that can’t be sold immediately due to certain regulations or contractual agreements. For example, insiders (such as company executives) may be restricted from selling their shares for some time after the stock is first offered to the public.

When a large number of shareholders are restricted from trading, it can reduce the float and make it harder to buy or sell the stock. Float is an important number for day traders and short-term investors to watch because it can have a big impact on liquidity and price.

If there aren’t many shares available to trade, it can be hard to find buyers or sellers, which can lead to wider bid-ask spreads (the difference between what buyers are willing to pay and what sellers are asking). A low float stock may also be more volatile because a small number of trades can have a big percentage impact on the price.

Some investors try to take advantage of low float stocks by selling them short. Short selling is when you sell shares you don’t own, in hopes of buying them back at a lower price and profiting from the difference. It can be a risky strategy because if the stock price goes up instead of down, you could end up losing money.

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Understanding The Operation Of A Stock Float

Float refers to the total number of shares accessible to the general public for purchase and sale. As a percentage of the company’s outstanding shares, it can be stated in either the absolute number of shares or the percentage of the company’s total outstanding shares.

Only 75 million of the 100 million total outstanding shares of a firm may be accessible to the general public. There are 75 million or 75% of the company’s outstanding shares in the float.

What, then, could be excluded from the float of a stock?

• Insiders own a large percentage of the company’s stock.
• Treasury stock held on the company’s balance sheet
• Stock with a temporal restriction on the owner’s ability to sell it
• A share that is not traded on the open market could be excluded from the float, in other words

Consider the following factors before deciding on how much stock is “floated,” or how many shares are available for trading:

More than 5% of the outstanding shares must be held by an investor to be required to file quarterly reports with the Securities and Exchange Commission (SEC).

As long as the stock is owned by a major long-term investor or a person classified as an insider, the stock will not be sold.

These calculations are based on the assumption that, like insiders with restricted stock, these investors are unlikely to sell their shares unless they become public with the news of their transactions. At least in the short run, investors may conclude that these shares are effectively encumbered.

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Stock Float: High Vs. Low

Only a small amount of a company’s stock is often sold in an IPO, and insiders often own a disproportionately large percentage of those shares, which are generally restricted. In the case of Robinhood, around 7% of the company’s shares were put up for sale.

A smaller float might have many different explanations, but here are a few of the most prevalent ones:

• IPO underwriters opt to sell only a portion of shares because they fear that market demand will be insufficient to absorb all of the outstanding stock.
• Insiders are unable or unwilling to sell all of their stock in the IPO.
• In the case of an initial public offering, a smaller number of investors who are more enthusiastic about the investment may assist lift the stock more than a greater number of investors.

A high initial public offering price can assist keep the stock price stable for extended periods, therefore it’s important to keep this in mind.

Difference Between Float, Authorized, And Outstanding Shares

Float, authorized shares, and outstanding shares all refer to the same thing.

Depending on the situation of the stock, it is possible to divide it into a few distinct categories, including the following:

• Shares that have been approved to be issued by a corporation are called authorized shares. Authorized shares reveal the maximum number of shares that a company is permitted to issue per its charter. Simply said, authorized shares provide the firm with the opportunity to sell the stock if it will become necessary for the company to do so in the future. A corporation can have a large number of authorized shares yet have no plans to issue any of those shares. The corporation helps protect investors from the possibility of runaway issuance by stating the total number of shares that are authorized.
• Outstanding shares are a measure of the total number of shares that are currently available for purchase. These shares consist of any that were made available to the general public as well as any that were distributed to various other stakeholders.
• The term “float” refers to the number of shares that are made available to the general investing public so that they can be bought and sold. It does not consist of items like a restricted stock that is held by insiders because it is not included. On the other hand, if company insiders decide to sell their stock at some point in the future, those shares will be included in the float.

To put this another way, the number of shares that can be issued is always higher than the number of shares that are actually in circulation, which in turn is always higher than the number of shares that have been issued to the public.

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The Bottom Line

Investors should take special care of the float, as it may be particularly relevant to their decisions, although in general, it is more pertinent in specific circumstances and during the short term. On the other hand, throughout a longer period, the performance of a stock is typically driven by the fundamental aspects of the underlying business. Ben Graham made the insightful observation that “in the short term, a market is a voting machine, but in the long run, it’s a weighing machine.”