What is floating stock?

Floating stock can seem like a confusing concept, but it is a crucial tool for investors. Here’s how to figure out the percentage of shares that are publicly traded.

What is floating stock                                 

Put simply, floating stock refers to how many shares in a particular company can be publicly traded. Although it may be fashionable to think that 100 per cent of stock in a firm is available to buy and sell, complicated corporate structures often mean this is not the case.

Major shareholders often hold a substantial chunk of total shares – giving them a louder voice when votes take place. Then you have to factor in the stock that might belong to employees, a common perk in larger businesses. On top of this, you have restricted types of shares. This is especially common in the immediate aftermath of an initial public offering, where investors and executives who hold a substantial amount of stock are barred from selling it until a later date, otherwise known as a lock-up period.

How to determine floating stock

Once you strip away the major shareholders, employees and locked-up shares, the shares left outstanding represent the floating stock. This figure tends to evolve somewhat – especially if a company engages in share buyback scheme, issues new shares, or if a larger investor decides to offload their stock. Stock splits are a particularly powerful way of enhancing the number of publicly available shares – given how every outstanding share is split into multiples to boost liquidity.

So: what is floating stock useful for gauging? Well, it can provide a valuable insight into the asset’s liquidity. Low float stocks, where there is only a small quantity of shares available on public marketplaces, are often prone to greater levels of volatility and a bigger divide between bid and ask prices, also known as the “spread”. When there are fewer shares out in the open, speedily finding a buyer or seller for the stock can be more difficult. Conversely, high levels of publicly available shares can often bring stability – something that isn’t attractive to all investors – as prices are far less likely to experience substantial movement in either direction.

Let’s take a look at floating stock in practice. Float Away (which sells helium balloons, in case you’re interested) has a total of 30 million outstanding shares. However, 20 million of them belong to financial institutions, executives are in possession of 5 million, and lower-ranked employees have been given 2 million shares between them as an incentive. All told, this means that there are 3 million shares left as floating stock – just 15 per cent of the total outstanding shares.

It is worth bearing in mind that everyday investors and traders have little to no impact on the proportion of floating stock that’s in the marketplace. That is because these shares have no relation to the large chunks of equity cordoned off by employees, executives and institutions. Equally, there’s no hard and fast way of defining low float stocks, so it can be worth doing some research to see how one company compares with rivals in that particular industry. If founders and executives own a substantial stake in the business – or have supervoting shares – this can ultimately deny everyday investors a voice in the future direction of a company.

One of the biggest risks when trading low float stocks lies in how companies may decide to issue new shares to increase the float and pique investor interest, effectively decreasing the value of the shares already in circulation.

What does floating on the stock market mean?

It’s not helpful that “floating” can have multiple definitions when it comes to the stock market. Floating a company on the stock market refers to the legal process of transitioning from private to public ownership – giving everyday investors a chance to own a percentage of the company. Although this procedure can help growing businesses gain a substantial amount of money, a successful completion can be complicated and expensive to say the very least.

Returning to the issue of floating stock, it is worth bearing in mind that many indexes rely on this indicator for calculating a company’s market capitalisation – the total value of stock. For investors, this metric is beneficial because it eliminates the shares of founders and hedge funds from consideration. Free float market capitalisation is used by the S&P and the FTSE among others — and when compared with overall market cap, you shouldn’t be surprised if the free float figure is substantially lower.

Although the concept of floating stock can be confusing to say the least, understanding the dynamics of a company’s ownership can be crucial in deciding whether or not it is an investment to pursue or avoid. Low float stocks carry the risk of investors being held hostage by executives who can do what they please with very little oversight from shareholders who don’t have the power to hold them to account.

FURTHER READING: Preferred stock vs common stock, what is the difference between them?

FURTHER READING: Apple stock predictions for 2020 and beyond

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