Float stocks calculation is carried out by subtracting the value of the closely held shares and the value of the restricted shares from the total outstanding shares of a company. It indicates the total number of shares that are available for investors in the market. We will see how to apply the float stocks formula in the calculation, its importance, advantages, and disadvantages.
What are float stocks?
Float stocks refer to the number of a company’s shares that are available for trading in the market. That is the shares of a company that are bought and sold freely by members of the public without any restrictions. They are simply the shares available in the open market that a company has to trade.
A company that has a small float is more volatile than a stock with a large float. Investors tend to invest in stocks that have a higher float stock because of their availability in the market. On the other hand, when the share float is low, it becomes an obstruction to active trading due to the scarcity of the stock or the market’s unavailability. Companies do issue equity or exercise their convertible debts when the share float is low.
A company may have a large number of outstanding shares but limited float stock. For example, if a company has 50 million outstanding shares, and out of these outstanding shares, large institutions own 35 million shares, management and insiders own 5 million shares, and the employee stock ownership plan (ESOP) owns 2 million shares. The company’s float stock will therefore be 8 million shares, that is 50 million shares minus 42 million shares, or 16% of the outstanding shares.
A company’s float stocks may rise or fall over time for different reasons. For example, a company may sell additional shares to raise more capital which then brings about an increase in the float stocks. There will also be an increase in the float stocks of restricted shares or closely-held shares become available.
If a company decided to implement a share buyback, then there will be a decrease in the number of outstanding shares. Here, the float stocks as a percentage of outstanding shares will also decrease. While a stock split will increase float stocks, a reverse stock split will decrease float.
It is important to note that a company is not responsible for the manner in which shares within the float are traded by the public. This is a function of the secondary market in the capital market. Therefore, shares that investors purchase, sell, or even short do not have any effect on the float because these actions do not represent a change in the number of shares that are available for trade. They simply represent a redistribution of shares. Similarly, creating and trading options on a stock do not have any effect on the float.
Float stocks calculation
To calculate the float stocks of a company, subtract its restricted shares and closely held shares (such as the shares that employees and significant shareholders own) from its outstanding shares.
Outstanding shares are the shares that a company issues and sells to investors. Restricted shares are shares that are temporarily restricted from trading because of the lock-up period after an initial public offering, this stock is non-transferable. Closely held shares are the shares that major shareholders, insiders, and employees own.
Float stocks formula
The float stocks formula is represented as;
Float stocks = Outstanding shares – (shares owned by institutions + restricted shares + ESOPS)
ESOPs = Employee stock ownership plan
Let us look at an example of the float stocks calculation.
Tesla has 10 million outstanding shares of which investors from large institutions own 5 million shares and Amazon owns 2 million shares. 1 million shares are owned by the management and insiders and 400,000 shares are not available as these are part of Tesla’s employee stock option plan (ESOP). The float stocks will be calculated below;
Float stocks = 10,000,000 – (5,000,000 + 2,000,000 + 1,000,000 + 400,000)
Float stocks = 10,000,000 – 8,400,000
Float stocks = 1,600,000 shares
This also implies that the percentage of float stocks out of the total shares outstanding of Tesla is 16%.
Many companies like Tesla will issue additional shares into the open market to raise additional capital and when it does so, their float stocks will also increase. On the other hand, if the company decides to exercise a stock buyback, its outstanding shares will decrease thereby reducing the percentage of stock float.
You can use our Finance Float Calculator
Advantages of float stocks
- The figure of float stocks helps investors to have an understanding of the total shares available for trading in the open market which in turn helps investors to decide whether to invest in a company or not.
- Large float stocks attract more investors because of the availability of shares in the market as well as their ease of borrowing and short selling. In other words, the higher the float stocks, the higher the number of investors that want to invest.
- Float shares give the company a clear picture of the number of shares that are owned by the public and based on this number, the company can decide whether to increase or decrease the number of outstanding shares.
- It helps in the identification of the volatility and liquidity of the stock.
- It is a reflection of a company’s goodwill.
- Any news related to the industry or sector, in particular, can have an impact on the volatility and liquidity of stocks with low floats. This in turn can give an excellent opportunity for investors to exit or sell the stock after finalizing a good trade.
Disadvantages of float stocks
- A stock with a small float can cause investors to refrain from investing due to the scarcity of the stock in the market.
- A company may issue additional shares to increase the float stocks even when the business does not require additional funds. This will bring about stock dilution which in turn will bring about dismay to the existing shareholders.
- When float stocks are low, it is easy to manipulate them with price actions influenced by large orders.
Shares outstanding vs float
Outstanding shares indicate the number of shares that are in existence including any shares sold to the public as well as any given to other stakeholders. Float on the other hand indicates the number of shares that are available for the general public to buy and sell. Float does not include restricted shares held by insiders. If, however, insiders eventually sell their stock in the market, these shares then form part of the float.
A float is usually a percentage of outstanding shares.
What is a low float stock?
A low float stock is a stock that has a relatively small number of available shares in the marketplace. This does not mean that companies with low float stocks do not have a lot of shares. Low float typically impedes active trading as it implies scarcity of stocks or market unavailability. This lack of trading activity makes it very hard for investors to either enter or exit positions in stocks that have limited float.
Institutional investors will always avoid trading in companies that have lower floats because fewer shares are available to trade and in turn, this leads to limited liquidity and wider bid-ask spreads.
What is a good float for a stock?
Generally, investors consider anything above 20 million shares as a good float for a company. It is with volumes like this that trading remains high and the market can avoid illiquidity which brings about an increase in volatility and bid-ask spread.
Is a low float stock good?
A low float stock is usually not good because it causes investors to refrain from investing in such companies. Also, low floats are easily manipulated.
What is considered a high float stock?
A high float stock is considered a stock that has a relatively large number of shares available for trading in the marketplace. When a company has a higher float stock, more investors such as mutual funds, pension funds, and insurance companies will want to invest. These institutional investors buy large blocks of stocks which makes them invest in companies with a larger float.