The floating of shares, or the float, is the total number of shares in the hands of investors that are available for trading. Knowing the float can help you to estimate how a stock is likely to act and to maximize your return by selecting stocks with a higher return potential.
When a company incorporates, it specifies the maximum number of shares it can issue. For example, XYZ may be authorized to issue up to 500 million shares. Corporations rarely issue all the authorized shares at once. XYZ might issue some shares to officers and directors, sell some shares in an initial public offering, but keep the rest for employee stock options, retirement plan contributions, to raise more capital in the future or to use the stock as currency to buy another company.
XYZ may only have 50 million shares issued and outstanding, but not all of those 50 million shares will be available for trading. Officers and directors may be long-term holders or have restrictions as to when and how much they can sell; shares in employee retirement plans can only be sold when an employee leaves the company; stock options must be exercised for a stock to be sold. Thus the total number of shares in the hands of investors -- institutional and retail -- that can be freely traded may only be 20 million, which is the "float."
Changes in Floating Supply
Generally, as companies grow bigger their share float increases. They may sell additional stock in secondary public offerings to raise capital, issue new shares when employees exercise stock options; or company executives, called insiders may periodically sell some of their holdings in the open market. On the other hand, some corporations may also buy back their own shares, reducing the float.
How Float Impacts Stock Price and Trading
If a small float stock becomes “hot” with investors, its price can shoot up in a matter of days or weeks, as too many buyers chase too few shares; a large float means there are plenty of shares to go around, so price moves are usually less dramatic. Traders often target stocks with a small float for short-term trading precisely because of the potential for large and fast price moves. Institutions buy stocks only when they are available in sufficient quantity. Prices of stocks with a very small float that lack institutional support tend to be volatile, because small investors and traders get in and out of them frequently at the slightest turns of events.
- The Boston Institute of Finance Stockbroker Course: Series 7 and 63
Based in San Diego, Slav Fedorov started writing for online publications in 2007, specializing in stock trading. He has worked in financial services for more than 20 years, serving as a banker, financial planner and stockbroker. Now working as a professional trader, Fedorov is also the founder of a stock-picking company.