Understanding a company’s stock float
The term “stock float” refers to a company’s shares which have been issued to the public that are available for investors to trade in the stock market.
So basically, the stock float is the number of shares available for public trading that can be freely bought and sold. It doesn’t count shares owned by company officers and insiders.
In the news when you read or hear about a certain company’s stock went up or down, they are referring to the regular shares of that company or the “float”.
The float is derived by taking a company’s outstanding shares (total shares) and subtracting from it any restricted stock. (Restricted stock is stock that is under some sort of sales restriction: for example, stock that is held by insiders and cannot be traded because they are in a lock-up period following an initial public offering.)
For example, a company may have 6 million outstanding shares and restricts 1 million for the company. Therefore, this company’s float would be 5 million, which is the number available for trading on the stock market.
A company’s float is an important number for investors because it indicates how many shares are actually available to be bought and sold by the general investing public.
The float value can change from year to year if the company decides to repurchase shares from the market or sell more of its authorized shares internally instead of publicly.
How a company’s stock float can affect the stock price
A company’s stock float can play an important factor in the price movement of its stock. A stock with a smaller float is more likely to feel the impact of volume spikes and dips.
Stocks with smaller floats can become very volatile than those with larger floats.
Generally, a stock with a smaller float will see low volume. However, when a stock with a smaller float sees an increase in volume, it can become very volatile and can see large gains very quickly.
This happens because it all boils down to supply and demand. Because of their limited supply, stocks with small floats can make major moves to the upside. But a stock with a low float can move to the downside very rapidly as well.
Low float stocks are sometimes a target for manipulation, where stock promoters or even sometimes traders will try to exploit these stocks because they are easier to move compared to stocks with larger floats. For example they may try to spread exciting rumors on a low float stock to generate interest in it and urge investors to buy. This sometimes can cause the price to move greatly higher.
The bottom line is that the fewer shares available combined with higher than normal volume can cause the stock to become very volatile and move either to the upside or downside. It is up to every individual investor to determine if the potential for huge gains is worth the risk.
See a List of low float stocks trading on the Nasdaq, NYSE & NYSEAMEX