Floating stocks are the total number of stocks available for trade on the open market. They can be calculated by subtracting closely-held (non-negotiable) shares and limited stock (non-transferable shares) from the total outstanding shares of a company’s share volume. In simple terms, floating stock is the aggregate shares of a company’s stock available in the open market.
Floating stocks denote the total number of shares available to the public for buying and selling. They reflect both the company’s general interests and the investors’ interests. Thus, these shares can also be used to calculate a company’s market value and reputation.
Closely-held refers to shares owned by shareholders who are directly related to the company as management or stakeholders. These shares cannot be listed on the stock exchange as ordinary shares. Limited stock is also known as restricted stock. Such securities constitute the body of shares that are non-transferable and non-tradeable.
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A company's free float of shares can be calculated by reducing the limited and the total number of closely held company shares.
Example
Suppose XYZ company has 50,000 outstanding shares with the following as shareholders:
Total: 32,000 shares {these are restricted or closely held shares that are not available for trade in the open market}
In this case, the floating stock of XYZ will be => 50,000 – (5,000+10,000+15,000+2,000) = 18,000 shares.
The above number is significant for investors as it reflects the total available shares traded openly by the public. Shares traded by investors do not affect the floating stock because this does not reflect any change in the restricted and closely-held shares.
The formula for Calculating Floating Stock
The outstanding shares of a company do not always signify the floating stock amount. The subsequent formula can be used to obtain the floating stock value:
Floating Stock = Outstanding Shares – {Restricted Shares + Institution-owned Shares + ESOPs}
Here,
Limited shares are non-transferable until the lock-up days after the initial public offering (IPO) is over. The shares are non-transferable.
ESOP is an employee stock holding policy in a corporation through which the workers get an ownership interest.
Significance of floating stock
The number of floating stocks determines the liquidity and volatility of the share. Small-cap companies, i.e., companies with a low number of shares available, have low floating stocks. Sellers or buyers for these stocks are not easy to find because fewer stocks are available to trade. Therefore, small float stocks tend to have more variations than larger ones.
A company’s free-floating stock changes over time. If a company sells more shares to raise more capital, the free float will increase. Conversely, if the company buys back the remaining shares, the free float percentage rate will fall.
A high percentage of floating stock represents fewer controlled shares. In such a case, stocks are less prone to the influence of institutions, management, or insiders who have confidential control.
A large number of floating stocks means more shares are available for public trading. Therefore, this facilitates buying and selling and attracts many investors. Institutional investors want to invest in large stocks in highly liquid companies. However, these significant acquisitions do not have a significant impact on the share price.
The stock prices of companies with substantial floating stocks are susceptible to company or industry news information. This volatility and liquidity provide more opportunities to buy and sell stocks in the market.
Limitations
Investors in small floating stocks companies are limited because insufficient stock prevents investors from investing. No matter the company’s business ability, this lack of stocks availability certainly hinders the opportunity to expand its investor pool.
The company may issue additional shares to increase the floating stock, even if no additional capital needs to be raised. This measure, however, may cause the share price to fall due to dilution, which will have a significant impact on existing shareholders.
Impact of floating stocks
A free float does not directly affect individual investors, especially those who invest in mutual funds, ETFs, and other securities. It also has no direct impact on investors investing in the company’s shares in the long run.
This is because the stock’s efficiency can be significantly improved by reducing the variable float stock. So, in that situation, it is the marketer’s responsibility to correctly assess the company’s future, its vision, performance, growth, and more such aspects.
However, low floating stocks directly impact investors who often buy and sell stocks as the value fluctuates a lot in the short term. In addition, when the size of the float decreases, investors may face the problem of lack of funds, which worsens the overall problem. Hence, if you are a short-term trader, it is not recommended to choose low float stocks; you may end up selling them at a lesser price when you invest in low stock floats.
