What is a Stock Float?
Stock float, also known by its more technical name, “shares outstanding”, is an important indicator that shows how many shares of a company are available for investors to purchase. Float is an important measure because it helps investors understand how much a company is worth and how much their potential share of its profits could increase or decrease. It’s also essential for determining how volatile a stock is; the smaller number of outstanding shares held by investors, the larger the potential for stock price volatility.
Understanding Stocks and the Float
A stock represents ownership in a company. When a company issues a certain number of shares, it puts its stock “float” up for sale. Some shares are owned by the company itself and are known as “treasury stock”. Other shares are sold to the public through a brokerage firm or exchanges such as the New York Stock Exchange (NYSE), the Nasdaq, or through over-the-counter (OTC) trading networks. As buying and selling of the company’s stock occurs, the company’s stock float changes to reflect the new ownership structure.
Types of Floats
There are two types of floats: “controlled” and “free”. A controlled stock float is a situation in which the majority of a company’s outstanding shares are owned and controlled by one person or a few individuals. These individuals control the stock supply, and can control when or if the remaining shares go to the public. Free floats, on the other hand, are shares available to the public. They are determined by the company’s current ownership, and can fluctuate in value based on investor activity.
The Effects of Float on Price
The stock float has a significant impact on stock price. A low float can cause prices to be more volatile as the relatively fewer number of shares trade. In contrast, a large float increases liquidity and reduces volatility, as there are a larger number of shares to trade and it’s easier to find buyers and sellers. Stock price is also affected by market makers and analysts covering a particular stock. Analysts are more likely to cover liquid stocks, and this can lead to more people and institutions buying stocks, increasing demand and the float can be a major driver of stock price.
Using Float to Increase Your Investments
With a good understanding of float and stock price, investors can use it to their advantage. For example, when the float of a stock is less than 10 million, it signals higher potential movement in the stock’s price. On the other hand, when a stock’s float is above 25 million, it’s a signifier that the stock isn’t volatile and can be overlooked. Investors can also use float to determine whether or not to buy a certain stock. If the float is stable and grows steadily, it’s a good sign that the company’s growth is sustainable and investors can benefit from it.
The stock float of a company can be an important measure in determining how much an investor stands to gain or lose from an investment. Knowing how to read the stock float of a company can help investors make better decisions and maximize their returns. Float is a good indicator of the liquidity and volatility of a stock, and understanding how it works is a key part of making sound investments.
