What Is a Floating Stock and How It Impacts Stock Price
Author: George Davis
Stock float is a condition that defines the number of shares a company has access to. Find out how stock float affects stock prices to make better trading decisions.
Listed companies are often restricted to share a certain number of shares they have. This restriction is implied on a company after its IPO. However, not all shares are restricted to be sold; otherwise, the company won’t have any means of generating capital. In the stock market, floating stocks are the number of shares that can be sold to the general public readily. If you are new to trading, this blog post will explain “what is a floating stock” and “How floating stocks impact stock prices.” So keep reading to learn more.
What Is a Floating Stock? How Stock Float Impacts Stock Prices
Floating stock is the number of shares of a company that can be sold in the stock market. A low stock float is a company that has a limited number of shares to sell. Floating stock is calculated by subtracting closely-held shares and restricted stock from a firm’s total outstanding shares. Closely-held shares are those that are owned by employees and major shareholders. On the other hand, restricted shares are those that cannot be sold due to temporary restrictions such as a lock-up period after an Initial Public Offering.
When there aren’t enough shares possessed by a company, its stock volatility increases. In contrast to companies that are free to trade more shares. This is because lack of shares available can cause a wide bid-ask spread resulting in uneven sales and fluctuating profit margins.
There are several ways through which stock float can impact the stock prices of a particular company. Some of these ways of influence are associated with the principles of demand and supply. Below we have shared how stock float impacts stock prices.
Demand and Supply
The principles of demand and supply are common in the stock market. When a company has only a few shares to trade, its stock price would be volatile. This volatility is due to the lack of shares creating a wide bid-ask spread. However, the gap is determined by the perceived value of the company. For instance, If a company has a good reputation, its share price will increase greatly, causing a disturbance in the stock market. In addition to the spike in price, there aren’t enough shares available to be sold, so the prices have a significant boost.
High Stock Float
A high stock float is one whose number of shares is abundant in the stock market. Such shares are less volatile because their huge volume can absorb any strong movement. That is why most investors prefer investing in high stock float options. A company may increase its number of shares by selling its restricted shares or if employees choose to cash out their shares for early retirement.
Stock float is a common condition in the stock market, and many professional traders know how to make a profit from the stock float. However, beginner traders have trouble identifying stock float, which becomes an obstacle to their success.
1. Tupperware Brands Corporation (TUP)
2. Regional Management Corp. (RM)
3. Olin Corporation (OLN)
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