The stock market can burn you.
Or, you can make a fortune.
Maybe even become the next Warren Buffet. Who knows?
But for that, you must do many things right — for example, getting a strong grasp of fundamental concepts like float stock (aka, floating stock or stock float).
Let’s go then and be better investors.
What is float stock?
Float stock or floating shares is the number of shares of a company’s stock available for public trading on stock exchanges like NASDAQ.
Floating stocks are of three broad types depending on the number of shares: low, medium, and high.
Later on, we’ll see what each float type means for investors and how you can profit from trading low float stocks.
We’ll also discuss in detail how to calculate float stock. Here’s the basic idea:
floating shares = outstanding shares – restricted shares
But before anything else, why must you care about float stock? Because it’s one of the key factors affecting a company’s share price.
Moreover, float stock indicates liquidity, volatility, and ownership structure. These are certain metrics you must consider to potentially make profitable strategies while trading and investing.
So much for an overview. Now let’s dive deeper.
Authorized shares vs. Outstanding shares vs. Floating shares
It’s wise to get a comprehensive overview of a particular company’s stock shares before investing in them. This is crucial to avoid bad choices and losses.
So, there are three ways of measuring the number of shares in a company’s stock, i.e., authorized shares, outstanding shares, and floating shares. Let’s understand these share-number metrics with the example of, say, ABC Company.
While forming the company, we must specify the maximum number of shares we would like to offer. This number denotes ABC Company’s authorized shares or authorized stock.
A few years later…
ABC Company is doing well. So, we decide to issue shares to the general investing public through an Initial Public Offering (IPO). These issued shares will form our company’s outstanding shares. The number of outstanding shares can be less than or equal to the authorized shares (total number of shares) but not more.
Now, all of our outstanding shares aren’t available in the public market. We have allocated some of them as incentives to company insiders and employees, with specific lock-up periods. This is our restricted stock.
Given all this information, can you calculate ABC Company’s floating stock? It’s pretty easy if you remember the formula.
The portion of outstanding shares available to the public — after subtracting the restricted shares — represents our floating shares or floating stock. We can express this either in absolute numbers or as a percentage of outstanding shares.
Types of floating shares and how they work
Now we know how to calculate a company’s floating share. The next key thing is identifying a stock float’s type based on its size. It helps day traders and long-term investors understand the supply of shares and gauge market volatility.
High float stock: If a large number of a company’s shares of stock are floating in the public market, it’s a high float stock. For example, if Stock A has billions of floating shares, it is considered a high float stock.
So, if you are a low-risk, long-term investor, consider stocks with larger floats. They tend to be stable and liquid and may offer steady dividends. These features also make high float stocks ideal for institutional investors and exchange-traded funds (ETFs) that track major indices like the S&P 500.
Quick tip:ETFs are a financial instrument, you can learn more about them from our blog post, ‘What is an ETF?’
Medium float stock: If the float of a stock is smaller than high floats and larger than low floats, it is a medium float stock.
Most mid-cap stocks have a medium stock float, issued by companies having a market capitalization of around $2 billion to $10 billion.
Low float stock: If a stock has a smaller float size of around 10 to 15 million shares, it’s a low float stock.
Institutions and long-term investors usually shy away from low float stocks due to their high volatility. But if you’re willing to play the high-risk-high-return game as a day trader, low float stocks have the potential to be a lucrative option.
One common issue with low float stocks is that it’s very difficult to enter or exit a position because of their low supply and liquidity. This is also why low float stocks typically have high bid-ask spreads.
Many people lose money on low float stocks when they cannot handle steep changes in stock price within a very short period of time.
And that brings us to the interesting point…
Some “best practices” for trading low float stocks
Begin with two things: the right approach and due diligence. Then you can add experience as you go, becoming better and better.
So, the first task is getting familiar with the risk and deciding your tolerance level. We’ve mentioned the risks above, i.e., low liquidity, high volatility, and high bid-ask spreads.
For tolerance, consider this maxim: invest only as much as you can afford to lose. But don’t let its pessimistic tone demotivate you — it’s meant to keep you rooted and avoid greed or regret.
Once you’ve oriented yourself into this sustainable mindset, get on with your due diligence. Here you must follow certain time-tested practices. Let’s discuss them in some detail.
Perform thorough stock analysis
Identifying the right stocks makes a lot of difference when it comes to making or losing money. There’s no fixed standard, but the most reliable way of doing this is through company-specific analysis.
Here are some aspects to consider while analyzing a company:
- Revenues: Check the revenues for recent years to see if there has been any growth at all.
- Financial ratios: Check the company’s price-to-earnings ratio, for example, to gauge its recent performance and future potential.
- Float percentage: Check the stock’s float percentage and how long it has been that way — this may help you time your low float trade better.
Usually, you’ll have to find the above information by looking at various platforms and websites. Public, however, streamlines this experience with a unified dashboard for company-specific analysis, so you get all the information in one place. Plus, you can manage all your stocks from a single app.
Read your charts closely and understand them well
If you want to profit from stock trading, it may help to be comfortable with lines and numbers and figures.
Particularly with intuitive and user-friendly charts in Public Trends, you can improve your game in understanding the market dynamics of low float stocks. For one, you can analyze a stock’s past performance using historical data.
More importantly, you can analyze a stock’s relative trading volume — i.e., the current volume vis-à-vis the volume in the previous period — which can be used to help time entry and exit points.
Follow the news and know the trends
The stock market is all about demand and supply — stocks with higher demand and lower supply tend to have a higher price and vice versa.
Now, since the supply of low float stocks is limited by definition, even a slight change in demand may open up massive profit-making windows. To understand when such shifts might happen, it helps to closely follow recent news and trends.
Public’s community feature can help by , allowing you to stay connected to fellow investors and up to speed on recent news. For example, when the charts indicate that there might be upcoming movement with a certain stock, you can discuss what you’re seeing with the community to find out if others are aware of any notable developments.
There’s more. You can hear live markets commentary and analysis from industry experts via Public Lives, which will further help you identify and track important news. That way, you can always stay in the game and avoid missing potential opportunities.