What is a stock float and how does it work?

What is a stock float?

A 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.

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

The size of a stock 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 stock float on their share price.

How does a stock float work?

When a company lists itself publicly, like those on the New York Stock 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 dole out 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 stock float is calculated using the following formula:

Stock 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 stock 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 float stocks

A low stock 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 float stocks are much more volatile than high float stocks. This is a result of a single trade having bigger ramifications than a trade using shares in a high float company. Low float stocks have a wider bid-ask spread than high float stocks.

Low float stocks are a good option for investors and traders who prefer a high-risk, high-reward approach to trading.

Medium float stocks

Medium float stocks are a middle ground between low float stocks and high float stocks. 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 stocks, medium float stocks are slightly less volatile. However, they are still prone to heavy volatility thanks to still having a relatively low number of publicly available shares.

High float stocks

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

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

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

How to trade or invest using a stock float

How to use a stock float when investing

A stock's float is useful for long-term investing because it gives you an idea about a stock'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-float stocks are ideal investment opportunities because they are 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 stock's float. For example, if a company announces a stock split or share buyback around earnings, it will affect a stock's float and interest in that stock from investors.

How to use a stock float when day trading

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

Day traders can use the following indicators to help them make decisions based on a stock's float:

• Relative Volume (RVOL)

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

• Reaction to news

Day traders can use the effects of previous news events on a low float stock's price to determine how it might respond to future news. This news can include financial results or macroeconomic indicators. Traders can target stocks that have shown volatility to this type of news in the past

How to trade using low float stocks

We offer a variety of markets to help you start your trading journey using stock floats. Spread betting and CFD trading are means of trading stocks on a leveraged basis. Spread betting lets you leverage your stock bet based on a deposit paid in advance. When trading CFDs, you similarly take a position on a stock's price movement without owning the underlying asset.

You'll need to keep in mind that, with leverage, you can gain or lose money much faster than you might expect – you could even lose more than your initial deposit.

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

1. Log in to your trading account
2. Find the asset you want to trade using the 'Search' panel
3. Input your position size
4. Choose 'buy' or 'sell' in the deal ticket
5. Confirm the trade

You can also practice using indicators like the CCI Indicator and by placing trades on a risk-free demo 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 stock 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 stock float is less prone to volatility than a low stock float. This makes it appealing to long-term investors rather than day traders

• Investor confidence

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

Cons of a stock float

• Reduced control

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

• Hostile takeovers

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

• Potential for insider trading

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