What is a stock float and how does it work?

What is a stock float?

A share (or stock) float refers to the number of company shares available to trade on the public market, after accounting for shares owned by insiders, such as company executives, directors and other large stakeholders.

Share floats can be categorised as low, medium and high. The size of a company's float can have big implications for its share price, primarily affecting its volatility.

The size of a share float can be affected by share repurchases and stock splits or reverse splits. Companies will judge these decisions in part because of the effect of the float on their share price.

How does a share float work?

When a company lists itself publicly, like those on the Australian Securities Exchange, it makes a certain amount of shares available for institutional and retail investors to trade on that exchange. The remainder is often doled out to insiders in the company.

Internal shares can be used by companies to offer large compensation packages to their executives instead of a traditional salary. These insider shares may also be restricted temporarily, such as in an initial lock-up period.

This process is often done initially by floating on the stock market through an initial public offering (IPO), where the number of shares available to the public is determined.

A share float is calculated using the following formula:

Share float = total shares in a company - shares held by insiders, including company executives, directors and other large shareholders.

For example, imagine a company has 20 million total shares, but 5 million are held by insiders in the company. This means the share float of that company is 15 million.

Types of share floats

There are three different types of stock floats: low float, medium float and high float.

Low share float

A low share float refers to a stock with fewer than 10 million shares available to the public. This is considered a low number of shares for a public float.

Because there are fewer shares available to trade, low share floats are much more volatile than high share floats. This is a result of a single trade having bigger ramifications than a trade using shares in a high float company. Low share floats also have a wider bid-ask spread than high share floats.

Low share floats could be a good option if you’re an investor and trader who prefers a high-risk, high-reward approach to trading.

Medium share float

Medium share floats are a middle ground between low share floats and high share floats. Companies with a market capitalisation of between $2 billion and $10 billion usually have a medium float. They have also been described as stocks with between 10 million and 100 million in publicly available shares.

Because their float is higher than low float shares, medium float shares are slightly less volatile. However, they’re still prone to heavy volatility thanks to still having a relatively low number of publicly available shares.

High share float

When the vast majority of a company's shares are publicly available to trade, it is described as having a high share float. Often this translates to over 100 million publicly available shares, but that can exceed billions.

High share floats are often a characteristic of major publicly traded companies.

High share floats are attractive if you’re a long-term investor, thanks to their low volatility, with an individual trade having minimal impact on the share price. They're also attractive to institutional investors and managers using ETFs and S&P 500 shares (known as the US 500 on our platform) for this reason.

How to trade or invest using a share float

How to use a share float when investing

A company’s share float can be useful for long-term investing because it gives you an idea about the company’s liquidity over time.

Investors tend to prefer price stability with a gradual appreciation of a stock's value to correspond with more occasional entry and exit moves. Accordingly, high share floats are possible investment opportunities because they’re less likely to be affected by one trade.

You can also use dollar-cost averaging to help smooth out volatility related to news that affects a company's float. For example, if a company announces a share split or buyback around earnings, it will affect a company's share float and interest in that stock from investors.

You can use our share trading account to invest in a company’s shares.

How to use a share float when day trading

Understanding a company's stock float can be an important skill if you’re a day trader, particularly highly volatile low float stocks – which can be popular for this type of trading.

You can use the following indicators that could help you make decisions based on a company's float:

• Relative volume (RVOL)

You can assess a share’s relative volume (RVOL) to consider whether it's worth trading or investing in. RVOL measures a share’s current trading volume against its trading volume in a previous period to gauge its popularity. Shares with a high RVOL and low float are likely to be more volatile and represent an opportunity for day traders

• Reaction to news

You can use the effects of previous news events on a low float share's price to determine how it might respond to future news. This news can include financial results or macroeconomic indicators. You could also target shares that have shown volatility to this type of news in the past

How to trade using low float shares

We offer a variety of markets to help you start your trading journey using stock floats.

CFD (contracts for difference) trading is a means of trading shares on a leveraged basis. When trading CFDs, you can take a position on an asset’s underlying price movements without owning the asset.

Once you have made your decision on how to trade using share floats, follow these steps to trade with us:

1. Log in to your CFD trading account
2. Find the asset you want to trade using the 'search' panel
3. Choose 'buy' or 'sell' in the deal ticket
4. Input your position size
5. Manage your risk
6. Place your trade

You can also practise using indicators like the Commodity Channel Index (CCI) indicator and by placing trades on a demo trading account with us.

It's important to remember that when trading with leveraged derivatives, you'll open your position with a deposit that's a fraction of the total position size. However, both profits and losses will be magnified to the value of the full trade. You can gain or lose money much faster than you might expect – you could even lose more than your initial deposit.

Pros and cons of a stock float

A stock float's pros and cons can be characterised as whether it is good to have a higher stock float or a lower one.

Pros of a stock float

• Liquidity

A higher share float increases the liquidity of that stock. This means it can be easier for investors and traders to buy and sell a company's shares

• Lower volatility

Because of the larger number of shares, a high share float is less prone to volatility than a low share float. This makes it appealing to long-term investors rather than day traders

• Investor confidence

A higher share float can engender higher confidence among investors, partly because a higher float percentage indicates more investors have demand for the shares, given the higher likelihood of bid-ask spreads being met

Cons of a stock float

• Reduced control

A higher share float can dilute an owner's control over the company by reducing the value of their stake. It can also leave the holding company struggling to make corporate decisions

• Lower demand

A larger share float can eventually reduce demand for a stock by creating more shares than there is demand for. This can bring down the company's share price. Companies may enact a share buyback programme if this occurs

• Hostile takeovers

A larger number of publicly available shares can leave a company vulnerable to a hostile takeover by letting anyone buy a sizeable amount of shares on the open market

• Potential for insider trading

A high share float increases the chances of insiders in the company engaging in insider trading. Evidence of insider trading can massively impact the value of a company's share price

What is a stock float summed up

• A share float indicates the number of shares in a company that are available to trade, and it excludes those held by insiders
• Share floats are typically broken down into low float, medium float and high float stocks, and are more volatile the lower the float
• Low share floats are beneficial for day traders who enjoy volatility
• High share floats can promote investor confidence and are typically better for long-term investors who like stability
• Day traders can look at a share's relative volume when assessing how to trade using the float