In the context of stocks, float and low float refer to the number of shares of a company that are available for public trading. It plays a key role in determining the liquidity and volatility of a stock.
1. Float:
- Definition: Float refers to the total number of shares of a company that are available for trading by the general public on the open market.
- Formula: Float=Total Outstanding Shares−Restricted Shares\text{Float} = \text{Total Outstanding Shares} – \text{Restricted Shares}Float=Total Outstanding Shares−Restricted Shares
- Outstanding Shares: These are all the shares issued by the company.
- Restricted Shares: These are shares that are not available for public trading, such as those held by company insiders (executives, founders) or institutions that are subject to restrictions on when they can be traded.
Example:
- A company might have 10 million total outstanding shares, but if 4 million shares are held by insiders or institutions, the float would be 6 million shares.
2. Low Float:
- Definition: Low float refers to a stock that has a relatively small number of shares available for trading on the public market. There is no fixed definition, but generally, a stock is considered to have a low float if there are fewer than 10 million shares available for trading.
- Characteristics of Low Float Stocks:
- Higher Volatility: With fewer shares available for trading, low float stocks tend to experience more dramatic price movements. Even small buying or selling pressure can lead to large fluctuations in the stock price.
- Lower Liquidity: Since there are fewer shares available, it can be harder for investors to buy or sell without impacting the price significantly.
- Potential for High Gains (or Losses): Due to their volatility, low float stocks can offer significant gains but also carry higher risks.
Example:
- A company with a total of 10 million outstanding shares may have only 1 million shares available for public trading (float), making it a low float stock.
Why Does Float Matter?
- Liquidity: The more shares available in the float, the more liquid the stock is, meaning it is easier to buy and sell shares without significantly affecting the price.
- Volatility: Stocks with a low float tend to be more volatile because a smaller number of shares are available for trading. A small number of buy or sell orders can lead to significant price swings.
- Market Movements: Stocks with low float can experience rapid price increases if demand rises sharply, as there are fewer shares to meet that demand.
Example of High Float vs. Low Float Stocks:
- High Float Stock: A large, well-established company like Apple has a high float, with hundreds of millions of shares available for public trading. This results in higher liquidity and relatively lower volatility.
- Low Float Stock: A small-cap company with limited public shares, such as a biotech startup, may have a low float, leading to more significant price fluctuations due to limited liquidity.
Conclusion:
- Float is the number of shares available for public trading.
- Low float stocks have fewer shares available for trading and are typically more volatile and less liquid than stocks with a larger float. Investors in low float stocks should be aware of the potential for higher risk and reward due to their price sensitivity.