What is low float stock?
Low float stock is a term used when the total number of shares available to trade is small. A low float stock is typically defined as a floating stock with fewer than 10 million shares or a floating percentage lower than 10% of the outstanding shares. While there are no firm rules about what constitutes a low float stock, this definition is generally accepted by most investors and traders.
Low float stock meaning
Low float stocks can be more volatile than stocks with higher float. This is because there are fewer shares available to trade, so any buying or selling activity can have a greater impact on the price. Low float stocks can also be more difficult to trade, as there may not be enough liquidity in the market to support large trades.
Therefore, low float stocks mean the available volume of shares for the public to trade is low which in turn means the stocks can be volatile and difficult to trade, so they’re not suitable for all investors. However, if you’re willing to take on the risks, low float stocks can offer the potential for large profits as well.
What is float stock?
A float stock is the number of shares available for trading and it can be calculated by subtracting the restricted shares and closely-held shares from the total number of outstanding shares. A float stock is also known as free float, public float, floating stock, or simply “float“.
Related: Use this Finance Float Calculator to find the number of shares available for trading.
Benefits of low float stocks
The advantage of low float stocks is that they tend to have higher spreads (which means the difference between the buy and sell prices is much); thus, the seller can make much profit when you are able to buy low and sell high; though there is no guarantee that the prices would go up when you buy, this is the risk in trading low float stocks.
Investors and Traders can find it hard to enter or exit positions in low float stocks; that is, you may want to sell your stocks but may not find a buyer for stocks with low float.
Institutional investors such as insurance companies, mutual funds, and pension funds avoid companies with low float stock; because when they buy large blocks of stock from low float companies, it will cause a large impact on the share price by driving the price up significantly.
Does trading of stock, options, or shorting affect the float of a company?
Trading of options, shorting of stocks, and buying or selling stocks has no effect on the float because these trading activities only redistribute the shares of a company and do not in any way reduce or increase the number of shares. When a trader is buying shares, the same amount is leaving the account of the seller, and therefore, the total number of shares of the company is not affected.
How does low float affect stock price?
Low float stock affects the stock price because of the limited number of shares available, this creates scarcity and therefore increases the demand for the stock, which may increase the stock price. However, it’s important to remember that a low float stock is not necessarily a good investment. Just because there are fewer shares available doesn’t mean that the stock must go up in value.
What is a good float percentage?
A low float stock is a stock that has a small number of shares available for trading. The number of shares available for trading compared to the outstanding shares gives the float percentage.
Are low float stocks good?
The good thing about investing in low float stocks is that there is less competition. When there are fewer shares available, it means that each share is worth more. So, if you can get your hands on a low float stock, you could see a nice return on your investment.
However, there is a risk associated with trading low float stocks as well because they can be very volatile. Because there are so few shares available, even a small amount of selling can cause the stock price to fall significantly. This can be risky for investors because it’s hard to predict what will happen next.
How to find low float stocks
There are a few ways to find low float stocks. One is to look at the “float” column on most stock quotes websites. This will show you the number of shares that are available for trading.
Another way to find low float stocks is to use a stock screener such as finviz, webull, or thinkorswim. Many online brokerages offer stock screeners for free. You can typically filter for stocks with a float of fewer than 10 million shares.
What can cause an increase or decrease in float stock
- Issuing additional shares
- Reverse split
- Share buyback
- Vesting and Exercising of stock options for employees
Issuing additional shares
A company may issue additional shares to raise money or to dilute the ownership of current shareholders. When a company issues new shares, the existing shareholders own a smaller percentage of the company, this is known as share dilution. By issuing more shares, a company is increasing the number of outstanding shares which also increases the floating stock.
Reverse splits decrease the floating stock. A reverse split is when a company reduces the number of shares outstanding by exchanging each shareholder’s existing shares for a smaller number of new shares. For example, a company may announce a 1 for 5 reverse stock split, this means for every 5 shares you own, it will be reduced to 1 share. This doesn’t mean you are cheated, it simply means the value of the 1 share you now own will be equivalent to the previous 5 you had. Reverse splits increase the value of shares.
This has the effect of increasing the stock price, but it also decreases the liquidity and raises the risk level.
A share buyback is when a company buys back its own stock. This can be done for a number of reasons, but usually, it’s done to increase the value of the stock or to return money to shareholders. When a company buys back its own stock, it reduces the number of shares outstanding, which can increase the value of the remaining shares. A share buyback can also be a way for a company to return money to shareholders without paying dividends. Buying back shares reduces the shares available for trading and leads to low float.
Vesting and Exercising of stock options for employees
Restricted shares and stock options are different forms of employee compensation that have an effect on the number of shares available for trading. Remember from the formula for finding the float stocks, we subtracted the held shares and restricted shares from the outstanding shares. That means when the number of closely held shares reduces, the float stock increases; this happens when stock options for employees are vested and exercised.
Vesting of stock options is the process through which an employee earns the right to buy shares of the company at a fixed price known as the strike price. The employee can then go ahead to buy the shares at the agreed price (a process known as exercising the stock options). When the stock options are vested and exercised, there is no more restriction to what the employee would want to do with the shares; this unlocks the restriction and makes the shares available to be traded and therefore, increases the floating stock of the company.