Stock Float is the number of total outstanding shares minus the restricted shares held by insiders and employees.
In other words, it is the total number of shares that are free to trade in the open market.
For example, a company may have 10,000 total outstanding shares but only 7,500 of those shares may actually be available to the public for trading in the stock exchange. In this case the float for the stock is 75% of the total outstanding shares.
In short, any shares that is not availble to public for trading should be excluded from the stock float calculation.
When a company releases its IPO, it fixes a number of shares that can be traded in the open market. This number does not change while trading in the stock exchange. In following cases, stock float or the number of shares traded in the stock exchange will change;
- Buyback Of Shares: Floats decreases when a company buy back some of the shares they have released onto the open market
- Secondary Offerings: Float increases when the company decides to sell more shares onto the open market to raise money
- Stock Splits: It can increase or decrease float. For example if company has decided to split a 10 rupees stock to 5 rupees stock, then float increases as more number of shares are into the market. However, if company decides to split a 5 rupees stock to a 10 rupees stock, then float decreases as less number of shares are available for trading.
Many day traders prefer to trade low float stocks as they can have big moves in intraday trading. Here are few reasons why many traders and investors are interested in float of a stock;
- it shows them how much stock is available for trading
- stock volatility: a stock with a smaller float will tend to be more volatile than those with a larger float.
- It gives ownership structure of the company to decide how investors will react to events such as buyout, right issues and secondary offerings.
