Floating stock refers to the number of shares of a particular stock that are available for trading in the open market. Stocks with low floating shares are typically characterized by high volatility. Floating stock is calculated by subtracting closely-held and restricted shares from a company’s total outstanding shares.
Closely-held shares are those owned by insiders, significant shareholders, and employees. Restricted stock consists of insider shares that are not available for trading due to certain restrictions, such as the lock-up period following an initial public offering (IPO).
A stock with a smaller float tends to be more volatile due to fewer shares being available for trading. This can lead to higher spreads and lower trading volume.
Key Takeaways
- Floating stock represents the number of shares a company has available to trade in the open market.
- To calculate floating stock, subtract the company’s restricted stock and closely held shares from its total number of outstanding shares.
- The amount of floating stock can change over time due to new share issues, share buybacks, or changes in insider or major shareholder ownership.
- Low float stocks typically exhibit higher volatility and wider spreads.
- Investors might find it challenging to enter or exit positions in stocks with low float.
Understanding Floating Stock: A Closer Look
A company may have a significant number of shares outstanding but still have limited floating stock. For instance, assume a company has 50 million shares outstanding. If large institutions own 35 million shares, management and insiders own 5 million, and the employee stock ownership plan (ESOP) holds 2 million shares, the floating stock is only 8 million shares (50 million shares minus 42 million shares), accounting for 16% of the outstanding shares.
Floating stock levels can change for various reasons. A company might issue additional shares to raise capital, increasing the floating stock. If restricted or closely-held shares become unrestricted, the floating stock also increases. Conversely, share buybacks reduce the outstanding shares, thus lowering the floating stock. A stock split will increase floating shares, whereas a reverse stock split will decrease float.
Why Floating Stock Is Important
The floating stock number is crucial for investors as it indicates the shares available for public trading. Low float usually hampers active trading, leading to difficulties in entering or exiting positions. This lack of trading activity makes stocks with limited float less appealing to institutional investors.
Institutional investors avoid trading in smaller float companies due to limited shares, low liquidity, and wider bid-ask spreads. Instead, such investors prefer investing in companies with larger floats, where large purchases are less likely to impact the stock price significantly.
Special Considerations
A company cannot control how shares within the float are traded by the public. This is managed by the secondary market. Thus, investor trades do not affect the floating stock—they merely redistribute existing shares. Similarly, the creation and trading of options do not impact the floating stock.
Practical Example of Floating Stock
As of September 2023, General Electric (GE) had 1.088 billion outstanding shares. Out of these, 0.20% were held by insiders and 75.81% by large institutions. Therefore, approximately 76%, or 830 million shares, were not available for public trading, making the floating stock about 260 million shares (1.088 billion - 830 million).
It’s important to note that institutions don’t consistently hold a stock. Changes in institutional ownership can signal broader trading trends—decreasing ownership may indicate that institutions are selling shares, while increasing ownership may indicate accumulation.
Evaluating Floating Stock: Is It Good or Bad?
The concept of stock float isn’t inherently good or bad, but it impacts investor decisions. High float stock tends to have lower volatility and higher liquidity, making it easier for investors to trade. Conversely, low float stocks experience more volatility, presenting unique trading challenges.
What Is Stock Flotation?
Stock flotation involves a company issuing new shares to the public to raise capital. The opposite is float shrink, often resulting from stock buybacks, which reduce the number of available shares.
Differentiating Floating and Non-Floating Shares
Floating shares are those available for trading, while non-floating shares are held by insiders and not available for trading.
The Bottom Line
Floating stock represents the shares a company has available for market trading. Traders usually prefer high float stocks as they facilitate easier and more liquid entry and exit positions. Stocks with high floats offer greater liquidity, allowing investors smoother trades.
Related Terms: restricted stock, IPO, spreads, liquidity, bid-ask spreads, reverse stock split.
References
- Macrotrends. “General Electric Shares Outstanding 2010-2023”.
- Yahoo Finance. “General Electric Company (GE) Major Holders”.
