Floating stock is the number of shares available for trading of a particular stock. Floating stock is calculated by subtracting closely-held shares and restricted stock from a firm’s total outstanding shares. Closely-held shares are those owned by insiders, major shareholders and employees, while restricted stock refers to insider shares that cannot be traded because of a temporary restriction such as the lock-up period after an initial public offering. A stock with a small float will generally be more volatile than a stock with a large float, apart from having limited liquidity and wider bid-ask spread. Because of these issues, institutional investors seldom invest in low-float stocks. Also known as share float or simply “float”.
A company may have a large number of shares outstanding, but a fairly limited float. For example, let’s say ABC Co. has 50 million shares outstanding, with major stakeholders as follows – Institutions 25 million, XYZ Company 10 million, Management and Insiders 5 million, Employee Stock Ownership Plan (ESOP) 2 million. Floating stock is therefore only 8 million shares (i.e. 50 million – 42 million), or 16% of outstanding shares.
Low float is typically an impediment to active trading. This lack of trading activity makes it difficult to exit long positions in stocks that have limited float.
The amount of a company’s floating stock will typically go up over time. This occurs because companies may sell shares in a secondary offering to expand the business or make an acquisition, or periodically when employees exercise their stock options.
Other corporate actions can also have a significant impact on floating shares. A share buyback, for example, decreases the number of outstanding shares, so floating shares as a percentage of outstanding stock will go down. Similarly, while a share split will increase floating shares, which may provide a temporary boost to the stock, a reverse split decreases float and makes it harder to borrow, which is a deterrent to short-sellers.
Sayed Farrukh Ahmed
Faculty of Business & Economics
Daffodil International University