An Insider’s Guide To Stock Float & Making It Work For You

In this article, we'll explore the concept of stock float and how it can be used to maximise profits when investing in stocks.

Updated: January 15, 2024
Matt Crabtree

Written By

Matt Crabtree

 
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The stock market can be a great way to grow your wealth, and it's clear why so many people are drawn to the potential rewards on offer. However, one idea that is often overlooked when it comes to investing in stocks is the concept of stock float.

Stock float refers to the number of available shares to be bought and sold on the open market, and understanding it can help you get ahead of the competition when it comes to investing.

In this article, we'll explore the concept of stock float and how it can be used to maximise profits when investing in stocks.

What Does Stock Float Mean for Investors?

Understanding the Basics of a Stock Float

If you’re a serious investor, you’ve no doubt heard the term “stock float” being tossed around. But just what is a stock float, and how does it work?

As touched on earlier, a stock's float is essentially the number of shares of a company that are available for public trading on the open market. Companies release shares of their stock to the market in order to raise capital. These shares are known as the “float”.

The float is important because it tells investors how many shares of a particular stock are actually available for purchase. If the float is small, it means there are relatively few shares available for purchase. This can create more competition for those shares and drive up the price of the stock.

On the other hand, if the float is large, it means there are more shares available for purchase. As a result, there is less competition for the shares, which can make the stock more affordable.

Before making a decision to buy or sell a particular stock, investors should always take a look at the float. If the float is small and the price is relatively high, it may be best to wait until more shares become available before making a purchase.

In addition to the float, investors should also be aware of the “free float” of a stock. This is the portion of the float that is not controlled by large shareholders and is free to be bought and sold on the open market.

Calculating the Impact of Float on Share Price

In general, a float is calculated by taking the total number of shares outstanding (shares issued by a company) minus the number of restricted shares (those held by the company, founders, or major shareholders).

The resulting number is typically the number of shares available to be traded on the general market. So, the higher the number of available shares, the higher the “float” for that stock.

Now, why does this matter for investors? Well, float can have a significant impact on a stock’s share price. Generally speaking, if there is a large number of available shares (a high float), then the share price will be relatively low.

This is due to simple supply and demand – if more shares are available, the price will be lower as buyers will be able to acquire them more easily. Conversely, if there is a low float, then the stock’s share price will be higher due to less competition for the same number of shares.

In addition to this immediate effect, float can also have long-term effects on share prices. For example, companies tend to issue new shares as a way to raise capital, and this can create additional float.

Generally speaking, companies that are able to raise capital by issuing new shares will experience a decrease in their share price in the short term. This is due to the influx of new shares, which can overwhelm the existing float.

So, as you can see, float is something that investors need to take into account when making their decision on which stocks to purchase. High float stocks come with the promise of greater liquidity, while low float stocks (while typically more expensive) can offer greater stability and rewards due to less competition.

In the end, understanding how to calculate the impact of float on share prices can help investors make the most informed decisions possible.

Outstanding Shares

Shares outstanding are a measure of a company's total outstanding shares, including both those held by shareholders and those held by insiders.

All publicly-traded companies must disclose how many shares are outstanding.

The total figure includes the number of shares that are held by the company, as well as those that have been authorised but not issued. It's important to note that the number of shares outstanding doesn't include any restricted stock that may be held by shareholders, or any shares held in treasury stock by the company for potential future use.

Shareholders should pay attention to the number of shares outstanding as it can provide some important insight into a company's stock performance. Companies with large numbers of shares outstanding are more likely to experience price volatility as the total number of shares trading can be quite large.

On the other hand, a company with a smaller number of shares outstanding is more likely to have more consistent stock prices as there is less liquidity in the market.

The number of shares outstanding is also important information for potential investors. It provides the total market capitalization of the company, which can be used as one measure of its size.

Companies with larger market capitalizations are typically seen as more established and hold more financial power than those with smaller market capitalizations.

Investing Strategies Using Float Information

Uncovering the Opportunities of Low Float Stocks

If you're an investor looking to maximize your returns, you should consider investing in low float stocks. Low float stocks are those stocks with a low number of freely traded shares, typically less than 10 million. While investing in these stocks can be risky, the potential rewards can be significant.

What makes low float stocks attractive to investors is the potential for significant price appreciation. They are often overlooked by major investors and institutions, so the few investors who own these stocks can experience significant gains when the stock increases in price.

In addition, they usually lack liquidity, so when stock prices increase there is often a noticeable jump in share prices as buyers rush in. This can create a spike in prices which could provide investors with a significant return on their investment and is especially effective for day trading.

Of course, investing in low float stocks comes with additional risks.

With fewer shares available to trade, supply and demand can greatly affect stock prices. Low floats can also be more volatile, and high price swings can occur quickly, meaning that investors may experience losses as well as gains. Additionally, the lack of liquidity means investors may have difficulty selling their shares.

Improving Your Chances

Despite the risks, there are some strategies investors can use to increase their chances of success when investing in low floats.

One effective strategy is to do extensive research and look for stocks with positive fundamentals such as strong revenue growth and healthy cash flows.

Alternatively, look for stocks with high short interest. This indicates that other investors believe the share price will fall, so if the company releases good news about its business, the share price could jump when the shorts are forced to cover their positions.

Finally, investors should also be aware of potential catalysts that could push a stock's price higher. This could include anything from a change in leadership to a major contract announcement, so be sure to pay attention to news and announcements related to the company.

Making the Most of High Float Stocks

High float stocks are stocks that have a large number of publicly traded shares.

To reiterate, the number of shares in a company's float refers to the total amount of shares that are held by the public. For example, if a company has a total of 1 million outstanding shares and 250,000 of them are held by the public, then the floating stock is 250,000.

Large publicly-traded companies tend to have large floats.

High float stocks tend to be less prone and volatile to large price swings. This is because investors tend to be more aware of a company's share price when there are more shares available on the open market.

As a result, it is relatively easy to buy a large amount of shares in a high float stock because there is a larger supply and demand equilibrium in the market.

There are many benefits to investing in high float stocks, including lower transaction costs, less risk, and less likely to be targets of short sellers. For example, if you buy high float stocks, you generally won't have to worry about paying large commissions and fees associated with buying low float stocks as the investment is typically short-term.

Additionally, high float stocks are less prone to manipulation by short sellers, who can drive down share prices by shorting a stock and then driving up the price again when they cover their position.

Now that you know what high float stocks are, here are some examples for you to consider:

  • Apple (AAPL)
  • Microsoft (MSFT)
  • Amazon (AMZN)
  • Alphabet (GOOGL)
  • Meta Platforms (META)

All of these companies are strong examples of blue-chip stocks with large floats and are generally considered to be low-risk investments.

Avoiding Common Pitfalls When Evaluating Float

A stock float evaluation is crucial in determining the value and potential for growth, but there are still a few mistakes you can make during an assessment:

Market Capitalization

Beware of investors who focus too much on the market capitalization of the stock price, rather than the underlying fundamentals of the company. Market capitalization is just a measure of value and it doesn't always accurately reflect the true intrinsic value of a stock.

Low Float Merchandise

Investors need to be wary of stocks with a low float, as this suggests there is little liquidity, which can reduce the chance of finding a buyer or seller. A low float can also indicate a high risk of price manipulation.

A Company's Outstanding Shares

Thirdly, it's important to consider the size of the share outstanding, as this will affect the potential returns from owning the stock. If there are too few shares, the price will be more volatile and the potential for profits will be reduced, whereas if there are too many, the stock may be unable to sustain a reasonable price.

Shorting

Traders should look out for stocks with a high number of short sellers, which can lead to artificial demand and price manipulation. Any large short position could mean that the stock could be driven down even further in the future if the short sellers decide to close their positions.

Newly Issued Shares

Finally, investors should be aware of a company's history of issuing new shares, as this can dilute existing shareholders' holdings and reduce the stock's value. New shares can also be used to cover up any problems the company is experiencing, and this could lead to further losses.

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