What are Floating Stocks?

The total number of shares of a company’s stock that are accessible on the open market is floating stock. It reflects the number of outstanding stock or shares that are accessible for trade to the general public and excludes tightly held shares or restricted stock.

A corporation with a low float has fewer shares accessible to trade, and it may be difficult to locate sellers or buyers since there are fewer shares available to trade. As a result, a small float stock will often be more volatile than a high float stock.

A company’s floating stock may fluctuate over time. When a corporation sells more shares to raise funds, the floating stock rises. On the contrary, if the firm buys back the shares, the number of outstanding shares decreases, and therefore the proportion of floating stock decreases.

Importance of Floating Stock

The float of a company is essential for investors because it reveals how many shares are genuinely available for purchase and sale by the general investing public. A low float is usually an impediment to an active trade. Investors may find it difficult to buy or exit holdings in firms with low float due to a lack of trading activity.

Because there are fewer shares to trade, institutional investors may typically avoid trading in businesses with lower floats, resulting in less liquidity and higher bid-ask gaps. Instead, institutional investors (such as mutual funds, pension funds, and insurance firms) will want to invest in companies with a greater float. If they invest in firms with a huge float, their substantial acquisitions will have less of an influence on the share price.

Example of Floating Stock

ABC Limited has 10 million outstanding shares, out of which 5 million shares are owned by large institutional investors, and 2 million shares own by  XYZ Limited. The management and insiders own 1 million shares, and 400,000 shares are unavailable as these are part of ABC Limited’s Employee Stock Option Plan (ESOP). This translates to 1.6 million shares of Floating Stock.

= 10,000,000 – (5,000,000 + 2,000,000 + 1,000,000 + 400,000)
= 10,000,000 – 8,400,000
Float = 1,600,000 shares

The percentage of floating stocks out of the total outstanding shares for ABC Limited is 16%.

Many companies like ABC Limited will issue additional outstanding shares into the open market to raise more capital; when it does, its floating shares will increase as well. But if ABC Limited decides to exercise a share buyback, it will decrease its outstanding shares and reduce the percentage of shares floating.

The bottom line is that aggressive trading gets hampered by a smaller float, making it difficult to sell long positions. Institutional investors will often avoid investing in firms such as ABC Limited in the previous example.

Because small floats have fewer shares to trade and hence higher volatility, small floats exhibit low liquidity and a wider ‘bid/ask’ gap. Institutional investors will seek for large floats to ensure that their acquisitions have no effect on the share price. Shares issued in the secondary market for corporate development or acquisition the value of a company’s floating stocks rises. When a company does a share repurchase, the number of outstanding shares in the market decreases, as do the floating shares. A stock split raises the total number of shares outstanding, which temporarily raises the floating stock.

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Formula for Calculating Floating Stock

The number of outstanding shares of a company does not always represent the floating stock amount. The formula given can get to find the floating stock figure:

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Floating Stock = Outstanding shares – Restricted shares – Institution owned shares – ESOPs

Where,

• Exchange cannot happen until the lock-up period following the IPO expires. 
• An employee stock ownership plan (ESOP) is a corporation’s employee stock ownership plan in which employees receive a stake in the company.

Features of a Floating Stock

• A company’s floating stock number informs investors about how many shares are available for trading in the market.
• A larger percentage of the floating stock suggests that institutions, management, or other insiders possess fewer controlled shares or huge blocks of stock.
• The amount of floating stock contributes to the liquidity and volatility of a stock.
• A high floating stocks number represents the ease with which shares can be traded. As a result, it facilitates buying and selling, attracting a broader pool of investors. Institutional investors like to buy huge chunks of a company’s shares with a greater float. These massive acquisitions, however, will have little impact on the share price.
• Share prices in companies with a high floating stock are particularly susceptible to business or industry news. Because of the volatility and liquidity, there are more opportunities to purchase and sell the stock.
• The floating stock number shows the public’s ownership of a company’s stock. Companies may choose to increase or decrease that amount based on their objectives.

Limitations of a Floating Stock

A floater with a tiny float will have fewer investors since the scarcity of equities discourages investors from investing. Despite the company’s promising commercial possibilities, this lack of availability may deter many investors.

A firm may issue more shares in order to enhance its floating stock, even if new money is not required. This measure will result in equity dilution, much to the chagrin of current shareholders.

Conclusions

The floating stock of a corporation is an important feature for investors since it shows the accessible shares to purchase and sell on the open market. Shares in the float are not under the company’s control since they get exchanged on the secondary market by the general public. As a result, any action such as a sale or buy has no effect on the company’s floating shares since these changes have no effect on the number of shares accessible in the market for trade. The trading of the option has no effect on it. On the basis of such stock, management can determine whether to issue additional shares, undertake stock splits, or reverse stock splits.