What Does Float Mean in Stocks?
Publicly-traded companies issue a finite number of shares. For some, it might be a million; for others, just a thousand. Either way, it’s the total share number available for investors to buy.
Understanding this will help us answer the question: “What does float mean in stocks?” In this post, you’ll learn what floating stocks are, how they work, and why they matter to investors.
Stock Float Meaning
So, what is a stock float? Well, the term refers to the total number of outstanding shares available for trading on public markets. Some companies are 100% publicly owned, which means that all their equity is available for purchase (so long as the bidder offers a high enough price).
Others have different ownership structures: For instance, half public shares, half private equity.
Whatever the case, the term floating stock applies to shares that public investors can purchase that haven’t yet been bought by anyone. Suppose a Fortune 500 company has 1,000 shares. If company insiders hold 400, that leaves floating shares of 600 for purchase by general market participants.
You may sometimes see float shares expressed as a percentage of the firm's total equity. In the above example, 60% of outstanding shares are available to trade, which is relatively high. However, if the public could only buy 50 shares, the stock would have a float of just 5%.
Here’s a summary of exclusions from a stock’s float:
- Stock held by people from the company (operators)
- Restricted stock (stock bound by special rules about who can own, buy and sell it)
- Stocks that the company keeps on its books
The Importance of Stock Float
When investors put money into a company, they want it to be profitable long-term. The higher the profits in the future, the faster they can grow their wealth. Not all firms achieve long-term success, however.
Float matters because of operator incentives. If executives have stakes in the companies they run, they are much more likely to put in the effort required to succeed. Just like conventional investors, they have partial ownership over future profits, so long-term performance matters to them.
Therefore, if a company has low float, it indicates that insiders are highly invested in its success. Executives aren’t just there to pick up a salary: Their investment is also on the line.
The reason investors care about float is liquidity: If the share float is low – say, less than 40% – then there may be times when there aren’t enough shares in the market, which can lead to high price volatility. Low-float share prices spike when demand is high, and trough when it is low, compared to conventional high-float stocks.
For this reason, institutional investors – hedge funds, banks, pension funds, and so on – don’t like low-float stock. They want high returns with low volatility.
Shares Outstanding vs Float
Outstanding shares refer to shares held both by public investors (including retail investors) and company insiders. It is simply the number of shares the company has issued so far. Apple, for instance, offers more than 16 billion shares for general investors to buy, holding only a tiny fraction – less than one percent – for insiders.
To calculate a company's market capitalization – the value of its equity – you multiply the outstanding shares by the share price. That gives you the value of the firm in the current market.
Thus, float and outstanding shares are not the same. So, what is a stock float? It’s a subsection of outstanding shares that’s available to trade.
Does Stock Float Matter To Individual Investors?
Now that we’ve answered the question: “What is floating stock?” we can tell you that the vast majority of the investing public doesn’t care much about stock float. If you have a diversified investment portfolio or you’ve bought an index-linked ETF, the float of any individual stock won’t have much of an impact on your overall performance.
The same applies to investors buying a single stock and planning to hold it for a long time. Float can increase short-term volatility, but it is not a fundamental driver of company value. That’s determined by the quality of the company and the relevance of the product to the market.
The only group that float may affect is investors who like to move in and out of stocks regularly. If a stock has a low float, it could have high volatility over a shorter time – something traders can use to their advantage.
In some cases, low trading volumes can also lead to larger bid-ask spreads: This is the difference between the price at which investors can sell the share to the market, and the price at which they can buy.
Generally, lower float means that you have to sell lower and buy stocks higher to cover the risk faced by other market participants. Timing purchases and sales, therefore, depends on how good the stock is in terms of float.
Lastly, the float also indicates the ability of a firm to raise capital. Companies with low float – those whose insiders hold more shares – have more shares to sell to the market to raise capital. Elon Musk, for instance, owns 17 percent of Tesla Motors, a stake worth around $200 billion as of December 2021.
He could theoretically sell those shares to raise capital for new investment projects for the firm.
Stock Buybacks And Float
Companies will sometimes buy back their own stock. When this happens, they transfer ownership from the general investing public to their insiders or associated corporations. Naturally, this process lowers the float.
Companies usually do this to increase their share price. Restricting the supply of shares in the float market makes whatever is left that much more valuable.
Stock buybacks were a major factor in the Gamestop saga of January 2021. The company had been buying back stocks for many years in an attempt to boost its share price. Eventually, the float dropped to record low levels, making it easier for certain market participants to manipulate the price. The quantity of outstanding shares fell so low that Gamestop equity became many times more valuable for a brief period.
In this post, we answered the question: “What does float mean in stocks?” Float is essentially a measure of a stock’s liquidity. It is the amount of stock available for trade on public markets.
Mostly, stock float won’t affect the general investing public. However, traders will need to consider it if moving in and out of stock positions regularly, or if a company begins lowering its float through buybacks.
What is a good float for a stock?
Investors view anything above 20 million shares as a “good float” for a company. With volumes like this, trading can remain high, and the market can avoid illiquidity, which increases volatility and the bid-ask spread. Floats below 20 percent of all outstanding shares are considered low-float stocks.
Is it good for a stock to have a high float?
In terms of market clearing, it is good for stocks to have a high float. With more liquidity, the bid-ask spread narrows, and investors can buy and sell more confidently.
High float, however, indicates that the general investing public owns the shares, not the operators. Thus, operators may not have a strong enough incentive to do a good job.
Is low float good or bad?
No level of float is inherently good or bad. Instead, it simply indicates that a company has relatively few outstanding shares for public purchase. Low float is good in the sense that it indicates that operators have an incentive to secure long-term profitability for the firm.
However, it could be bad for institutional investors because of higher volatility. The opposite is true of high-float companies.
Where is the float on a stock?
You can answer the question “What is the float of a stock?” by finding the total number of outstanding shares (usually quoted by the company) and then subtracting the number already owned by insiders (again, usually quoted).
I have always thought of myself as a writer, but I began my career as a data operator with a large fintech firm. This position proved invaluable for learning how banks and other financial institutions operate. Daily correspondence with banking experts gave me insight into the systems and policies that power the economy. When I got the chance to translate my experience into words, I gladly joined the smart, enthusiastic Fortunly team.
More from blog
Your email address will not be published.