What is a Stock Float? Examples of High Vs. Low
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Summary:
A stock float is the number of company shares that are available for the public to purchase. Companies can have a high float or a low float. A high float indicates a large amount of stock is available to the public. A low float, on the other hand, means most of the stock is already held by other investors.
When you’re buying individual stocks, it’s important to look at various characteristics of the company to ensure it’s the right fit for your portfolio. One of the factors you’re likely to consider is a stock’s float, which is the number of shares available on the open market. Floating stock can tell you a lot about a company’s ownership structure and price volatility.
The type of investor you are will determine what type of stock you’re likely to include in your portfolio. An active trader may prefer stocks with a bit more volatility (which is better for low float stock), while a buy-and-hold investor probably wants more stability (high float). In this article, we’ll help you to understand what a stock float is, how it works and why the float is important to investors.
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What is a stock float?
Stock float refers to the number of shares of a particular stock that are available for investors to purchase. The stock float — also known as floating stock — is calculated by subtracting restricted stock from the outstanding shares.
How to filter companies with similar float shares?
You don’t have to manually calculate a companies’ float stock. Multiple brokerages will provide advanced research and analysis tools that allow you to screen companies based on having a high or low stock float. The brokerages below are a good place to start if you are looking for an investment platform.
What is the difference between authorized, outstanding, closely-held, and restricted shares?
There are several different terms that are used to describe the amount of stock a company has, but they each mean something slightly different. Below we’ll explain the difference between authorized shares, outstanding shares, closely-held shares, and restricted shares.
- Authorized shares. When a company files its charter and registers with the Securities and Exchange Commission, it sets a number of authorized shares, which is the total number of shares it’s allowed to sell. In reality, the vast majority of companies sell far fewer shares than they’re authorized to in their corporate charter.
- Outstanding shares. The number of outstanding shares a company has is the total number it has actually issued, which, as we said, is usually far less than its authorized shares. The outstanding shares include those available in a public market, those owned by the company, and those held by company insiders.
- Closely-held shares. Closely-held shares are stocked that are held by a small number of investors in a corporation where a small number of investors own most of the available shares.
- Restricted shares. These are shares held by company insiders. They are unregistered shares in a corporation that are issued to executives, directors, and other corporate affiliates. Restricted shares have specific rules regarding when the share can be sold or who it may be sold to.
Pro Tip
Shares outstanding is an important factor in calculating a company’s market capitalization, which is the number of outstanding shares multiplied by the price per share.
How a stock float works
As we mentioned, a company’s floating stock doesn’t include all of its stock. There are a few types of stock that might be excluded from a company’s float. These include:
- Restricted stock
- Closely-held shares
- Shares owned or repurchased by the company, also known as treasury stock
A company’s stock float is usually expressed as a number of shares. For example, a publicly-traded company has 10 million total shares, but 2 million are owned by company insiders. This means the company would have a float of 8 million.
In other cases, the float is represented as a percentage, meaning that the same company would be said to have a float of 80%. The good news is you don’t have to calculate the float yourself. When you search for stock online, you can easily find its current float.
What is a good float for a stock?
While there’s not an exact threshold for what’s considered a high or low-float stock, many investors use 10 million as a rule of thumb. A stock with fewer than 10 million shares of floating stock would be considered a low-float stock, while one with more shares would be considered a high-float stock.
How do stock buybacks affect float?
One practice that’s become common among companies is what’s known as a stock buyback or stock repurchase, which is when a company buys back its own stock. Instead of being available for purchase by investors, the shares are held by the company.
Buybacks can benefit both the company and its shareholders. For the company, a buyback can increase its stock price, as well as its financial ratios. As for current shareholders, a buyback increases their stake in the company and possibly their dividends.
Stock buybacks also have the effect of reducing a company’s float. Because there are fewer outstanding shares, there are also fewer shares available to purchase. For that reason, a buyback is often referred to as a float shrink. This move can increase volatility and make it more difficult for investors to find buyers or sellers.
Why is floating stock important?
As an investor, it’s important to pay attention to the float on a stock you plan to purchase. Why? A stock’s float tells you more than just how many shares are available for trading. It also gives you an idea of what stake of the company you would own as a shareholder.
High float stock
When a company’s stock has a high float, it’s easier to trade. There are more shares available for buyers, and it’s easier for sellers to find someone to buy their shares. Additionally, high-float stocks tend to have more price stability since the sale of a large number amount of stock doesn’t have as large an impact on the stock’s price.
If you’re a long-term investor looking for stocks to add to your portfolio, you might prefer those with a higher float. Day traders may prefer to avoid stocks with a high float. Because there’s less volatility for the stock, it’s more difficult for traders to profit from short-term price fluctuations.
Low float stock
When a stock has a low float, it means there are fewer shares available for purchase. Investors may have a more difficult time finding a buyer or seller for their shares. Additionally, these stocks tend to be more volatile.
Stocks with a lower float tend to be more volatile because it takes fewer shares being sold to affect the stock price. This volatility might be attractive for day traders who can use it to earn short-term profits. But for an investor who plans to simply buy and hold the stock, volatility can feel overwhelming and cause uncertainty.
It’s also important to note that while the stock float represents the number of shares available to the public, it’s not necessarily the number of regularly traded shares. For that, you would need to look at the volume. If a stock has a high float but a low volume, it could still be a sign that it would be difficult to buy and sell stock exactly when you want to.
What kind of investor are you?
Your approach to investing will play a heavy role in how you view stock float. Do you prefer the quick sale of a day trader or the stable growth of a long-term investor?
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Pro Tip
You can eliminate some of the negative effects that a low-float stock can have on your portfolio by investing in mutual funds and exchange-traded funds (ETFs). Rather than holding just one stock (or a few stocks), you would own hundreds or thousands, meaning the impact of any single stock on your portfolio is minimal.
Be careful trading low-float stocks
If you’re planning to trade low-float stocks, it’s important to understand what you’re getting yourself into. Every type of investing involves some risk of losing your money, but the risk for low-float stocks is even greater.
These stocks are more volatile, meaning the price is likely to drop more quickly (and more frequently) than high-float stocks. Additionally, these stocks have less liquidity, meaning it’s more difficult to buy and sell shares exactly when you want. This lack of the stock’s liquidity also means you have less control of the price at which you buy and sell. There’s generally a wider bid-ask spread with these types of stock.
Finally, consider including some low-float and some high-float stocks in your portfolio. Experts generally recommend building a well-diversified portfolio that limits the risk from any individual asset. However, many also suggest you can set aside a small percentage of your portfolio for speculation and higher-risk investing. That portion of your portfolio might be a good place to include those low-float stocks.
Pro Tip
If you decide to day trade low-float stocks, pay attention to the trading volume. A stock that has a low float but still a comparatively high volume may still be more liquid, meaning you’ll have an easier time buying and selling shares.
Stock float example
As of March 24, 2022, Tesla had more than 1.03 billion outstanding shares. However, more than 18% of those shares were owned by company insiders, meaning they weren’t available for investors to purchase. The remaining 843.52 million shares were the stock float, meaning they were available for investors to purchase. It’s clear based on this number that Tesla would be considered a high-float stock.
It’s also important to note that just because more than 843 million shares are available doesn’t mean that’s how many are regularly traded. In Tesla’s case, nearly 43% of shares are held by institutional investors, which may include mutual funds, hedge funds, and other organizations. Tesla’s actual average volume — meaning the average number of shares traded per day — is about 26.5 million. One reason for the considerable difference between the stock float at the trading volume is that institutional investors don’t tend to trade their shares often.
Key Takeaways
- A stock float refers to the number of a company’s shares that are available for the public to purchase.
- Float is calculated by subtracting restricted stock, treasury stock, and closely-held stock from the total number of a company’s outstanding shares.
- A stock with a low float has fewer shares available and is generally more volatile, while one with a high float has many shares available and more price stability.
- Investors can use a stock’s float to determine whether it will be a good addition to their portfolio.
Related reading: You’ve learned that stock buybacks can reduce float. But what other reasons do companies have for buying back their own stock? Find out by reading Why Do Companies Buy Back Shares?.
EG
Erin Gobler is a Wisconsin-based personal finance writer with experience writing about mortgages, investing, taxes, personal loans, and insurance. Her work has been published in major outlets, such as SuperMoney, Fox Business, and Time.com.
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