What Is A Float In Stocks?: Definition, Low vs. High
A stock's float shows how many free-trading shares of a publicly-traded company exist. Float can be either a precise number of shares or a percentage of its total shares outstanding.
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What Is Stock Float?
Stock float, or as it's also known, floating stock, is the amount of shares of a company that are freely-trading on the secondary market. Stock float excludes shares that are held by executives, directors, and other insiders of a company. It also excludes shares which are under trading restriction and not currently eligible for sale.
Stock float is an important metric because it gives investors a sense of the liquidity of a company's stock. Often, people look at market capitalization first, as that gives the overall value of a company including all of its outstanding shares. However, if insiders own a large portion of those outstanding shares, the true stock float will be far smaller.
There are two common ways to look at stock float.
- An absolute figure: simply the total number of freely-trading shares.
- A percentage: shows the amount of stock float in proportion to the total number of shares outstanding in a particular company.
Note: Sometimes investors refer to issuing new stock to the public, such as through as an initial public offering, as floating a stock. This is a different meaning than the more common one detailed in this article.
What Is Not Included in the Float of a Stock?
Typically, the following categories of shares are not counted in a stock's float:
- Shares owned by officers of a company
- Shares owned by directors of a company
- Shares owned by a charitable foundation or trust affiliated with the company
- Shares that are still under restriction and cannot yet be sold, for example, restricted shares following a recent IPO
- Restricted shares granted to employees as part of their compensation package but which have not yet vested
High Float vs. Low Stock Float
A high float stock is one where the vast majority of a company's total outstanding shares are freely-traded. Examples of this would be many S&P 500 companies where ownership of its shares is highly dispersed and insiders tend to hold small positions in the firm. As a general tendency, the longer a company has been publicly-traded, the more freely its stock will float.
A low float stock, by contrast, has insiders which control a bunch of the total outstanding stock. Is it bad for a company to have a low float? Not necessarily. Oftentimes, in fact, it's a sign of alignment between insiders and their public shareholders. Some investors prefer to invest in companies where the founder or a family control the firm.
On the other hand, a high stock float can be beneficial in that it provides more liquidity and tends to lead to lower volatility of a share price. It's much harder for short-term traders to manipulate or otherwise disrupt the share price of a high float company as opposed to one with a small float.
Common Reasons for Low Floating Shares
- Company is a recent IPO: When a company issues stock to the public for the first time, generally, a large portion of its existing shareholder base is restricted for selling for a certain period of time following the IPO.
- Company came public via a SPAC: It's common for Special Purpose Acquisition Companies (SPACs) to purchase only a small slice of a total outstanding company. This leaves the prior owners with a large portion of the total outstanding share count.
- Company Is Family-Controlled: There are numerous companies where the founding family retains majority control of the firm. It lists a minority stake in the company to provide liquidity and a public market for shares, however insiders keep the largest share of stock.
- Company Has a Large Associated Charitable Foundation: Sometimes, founders donate a large portion of their holding to a related charity when they pass on. As long as the charity holds these shares, they are typically excluded from the float.
- Company Uses Stock-Based Compensation Heavily: A lot of tech companies pay their employees in significant part with restricted stock and stock options. These shares do not enter the float until they vest and become freely-tradable.
- Company Buys Back Tons of Stock: Some firms buy back stock aggressively, reducing the outstanding share count dramatically and thus increasing the relative share ownership of insiders.
Why Stock Floats Matter to Investors
Stock float is particularly important for short-term trading. A low float company is likely to be much more volatile than a higher float company with the same market capitalization. The less publicly-traded stock there is on offer, the easier it is for the stock price to make outsized moves.
Another big consideration is due to indexes and passive investing. Many stock market indexes base their calculations around weighting securities on the float-adjusted value of the company rather than the total market capitalization. This can mean that companies owned in large part by families, founders, or other groups of insiders will be systematically underrepresented in major stock market indexes and related ETFs.
Finally, there can be big changes in a stock's valuation if it goes from being a low float to high float company. An example would be when a bunch of restricted stock related to an IPO lock-up concludes its restricted period and becomes eligible for trading. Stocks can sometimes post large declines around these share unlock periods.
Stock Manipulation and Float
Sometimes, unscrupulous actors may look to take advantage of a stock with a low float to try to drive rapid price movement in that security. It is much easier for a stock promotion or other such coordinated effort to work when the supply of shares available to trade is limited. For example, a series of comments on a social media site or forum may have a sharply higher impact on a stock where only a small portion of its shares are freely-traded.
Consider a company with 10 million shares trading at $5 each, all of which are in the free float. It would take $5 million to buy just 10% of the free float of the stock, and such purchase would probably not cause too much volatility in the underlying stock price. However, if the same company had just 1 million of its 10 million shares available in the free float, that same $5 million purchase would buy up all of the free float of that company and probably cause a gargantuan move in the price of the underlying security.
A company with a high float is much less vulnerable to pump and dumps or other such untoward schemes. Whereas, a company that is tightly-held by insiders or which has just completed an IPO or SPAC deal may be more prone to this sort of unscrupulous activity.
NOTE: Also consider whether a stock has listed options or not. A stock with no corresponding options market in effect has a smaller float since speculators can't use calls or puts to express bets on the future price action of the company.
Bottom Line
Stock float is a key component of understanding a company's shareholder base. If a company has a low float, that may mean that it has a strong ownership base with tons of participation from its executives and directors. It could also, however, cause a low float stock to experience more volatile and unpredictable trading conditions.
This article was written by
Ian Bezek is a former hedge fund analyst at Kerrisdale Capital. He has spent the decade living in Latin America, doing the boots-on-the ground research for investors interested in markets such as Mexico, Colombia, and Chile. He also specializes in high-quality compounders and growth stocks at reasonable prices in the US and other developed markets.
Ian leads the investing group Learn more .Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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