While strong buying demand will move a stock higher, that demand impacted by this factor can move a stock much higher. The same applies when selling pressure overwhelms bids, lowering a stock price. This factor is called the float. In this article, you'll learn "What is float in trading stocks?" and "What does float mean in stocks?"
The float is not often discussed but can greatly impact a stock's price. It can mean the difference in liquidity, volatility and spreads. By the end of this article, you'll understand stock floats and how they can affect your trades.
What is Float?
What is "float" in stocks? A stock's float is the stock supply currently in circulation and available for public trading. The float includes all shares held by retail and institutional investors, including mutual funds, hedge funds, exchange-traded funds (ETFs), pension funds and all nonaffiliated entities. It doesn’t include restricted stock, preferred stock, treasury stock, insiders, company affiliates and control groups.
Restricted shares are unregistered, non-transferable and not tradable until they meet certain regulations or vesting schedules. They are often awarded as compensation for insiders and come with restrictions on trading, like a lock-up period or vesting period. While restricted stock is not part of the float, the awarding of restricted shares, also referred to as stock-based compensation (SBC), is posted as an expense under generally accepted accounting principles (GAAP) reporting. However, it is not reported under non-GAAP reporting, which is controversial since many believe that equity-based compensation is still compensation despite being restricted.
Companies will often sell restricted stock through private placements to raise capital. It's a cheaper way to raise capital versus making a public or secondary offering. These shares tend to have a holding period ranging from six months to two years and additional stipulations.
As the restricted stock gets vested and meets specific stipulations, it gets registered and converted into regular trading common shares. These shares get added to the float. When too many of these restricted shares convert to common shares, it can have a dilutive effect.
When company insiders prepare to sell stock, they file a Form 144 Notice of Proposed Sale of Securities with the U.S. Securities and Exchange Commission (SEC), notifying them of the intent to sell restricted or controlled securities, stock held by affiliates. Once shares sell, they get added to the float. The seller must file a Form 4 Statement of Changes of Beneficial Ownership of Securities with the SEC disclosing the number of shares and prices sold.
Understanding How Float Works
The float of a stock can impact how it trades. A high-float stock tends to have more stability and lower volatility. A high float is considered a stock with over one billion shares in its float. Most blue-chip and dividend aristocrat companies are large-cap stocks with high float shares, making them much harder to manipulate.
Conversely, stocks with low floats can have sporadic price fluctuations, lower volume and lower liquidity. Low-float stocks are stocks with under 100 million shares in the float. These stocks can be volatile. Adding in a high short interest above 20% is a recipe for a short squeeze or even a candidate for a meme stock. As for trade execution, a high float can result in better trade fills since the bid and ask spreads are tight, like one cent.
A low float stock can result in more slippage and frustrating trade fills as the bid and ask spreads can range from 25 cents to $1. Some of the best low-float stocks are meme stocks that can have large price moves from short squeezes.
What is a Good Float for a Stock?
The answer is completely subjective and depends on the trader. If you're a momentum trader that likes to jump on high-risk volatile stocks, then a thinner float stock with high short interest and heavy trading volume may be your preference. Long-term investors or swing traders may want less volatility and prefer stocks with thicker floats like blue-chip and dividend stocks. Thicker floats tend to be more stable and are suitable for long-term accounts like IRAs.
Why is Low Float Good?
A low or thin float can be good if you are an active momentum trader or speculator looking for heavy volatility and large price swings. Low float stocks can often move on no news but drop fast when the volume thins outs.
What is Considered a High Float?
Stocks with over one billion shares are widely accepted as having a high float. These tend to be large capitalization (large-cap) stocks that are widely traded and well-known among investors. They are usually components of a benchmark index. Major companies like Apple Inc. (NASDAQ: AAPL) have floats of more than 15 billion shares.
How Do Floating Shares Differ from Other Types of Shares?
When trying to understand float meaning, also learn about the structure of stock shares. Stock shares have three main classifications: authorized, outstanding and fully diluted.
Float vs. Authorized Shares
Authorized shares are the total number of shares a company has the right to issue but may not be issued completely. The number of authorized shares is set when a company is incorporated. Authorized shares are the legal maximum limit of shares that may be issued.
Authorized shares can be increased pending shareholder approval. Public companies often leave a portion of authorized shares unissued to be able to use them for raising capital with secondary offerings later.
Float vs. Outstanding Shares
Outstanding shares are the total number of issued shares of a company's stock held by all shareholders. However, they are not all available for the public to trade. They are out of circulation because they're restricted treasury stock held by controlling shareholders and insiders. With those shares out of circulation, the remaining shares readily available to trade publicly is the float.
Float vs. Fully Diluted Shares
You may have heard "fully diluted shares" in earnings reports when they report earnings-per-diluted shares. Fully diluted shares are the outstanding shares plus the additional common shares that can convert upon exercising convertible securities, preferred stock and warrants.
How to Determine Float
Now that you know the difference between the share classifications, you might wonder, "What is the float of a stock — how do I figure it out in real life?"
You can look up the float for a stock on MarketBeat or calculate and determine the float manually. You will need some information beforehand. Find the total number of outstanding and restricted shares through a company's proxy statement filed under DEF 14A with the SEC.
You'll get a list of shares owned by company insiders, including executives, directors and beneficial owners. Subtract the number of restricted shares from the outstanding shares to calculate the float shares.
How a Company Increases Floating Shares
A company can increase its float in many ways, including through:
- Stock splits: A company can increase its float by splitting its stock. It's like taking a pizza with eight slices and cutting each piece in half. The total slices grew to 16 pieces, but the pizza is still the same size as when it was eight. This would be a 2-for-1 or 2:1 stock split.
- Register and convert restricted stock: When it meets its conversion requirements, it becomes registered and added to the float.
- Issue new stock: A company can issue more stock to increase the float. Usually, this is done when raising capital through a secondary offering. A company can issue stock shares up to the total authorized shares.
- Convert convertible securities: When preferred stock or convertible bonds convert to common shares, they get added to the float. Some conditions, such as price, time, or other milestones, must be met to trigger the conversion.
How a Company Decreases Floating Shares
A company can decrease its float in many ways:
- Stock buyback programs: A company can institute a stock buyback or repurchase program where it occasionally purchases common stock in the open market. Buyback programs set an authorization amount cap and a time frame. A company isn't obligated to buy all shares up to the authorization amount. These programs can be extended and or authorize more funding.
- Reverse stock splits: A reverse stock split is the inverse of a stock split. In this situation, you glue the 16 smaller pizza slices back into eight, or even four, slices. A reverse split naturally shrinks the float. A reverse stock split of 1-for-4 or 1:4 means every four shares of stock will be worth one share.
- Take the company private: The ultimate way to reduce or eliminate the float would be to buy back all its shares and go private or have another company make an all-cash acquisition. These situations would eliminate the float and outstanding shares as the buyer acquires them.
Example of Float
Here are some examples of stocks and their float versus outstanding shares and short interest. The rule of thumb is that a thicker float ensures tighter spreads between the bid and ask prices. This ensures more liquidity and less slippage. It also tends to foster smaller short interests. Look for the float information on a stock on MarketBeat under the Short Interest tab on the stock summary page.
Semiconductor giant Micron Technology Inc. (NASDAQ: MU) is a well-known memory and storage chip maker with a thick float of 1.09 billion shares. The short percentage of the float is small, at 1.79%. Combining a large float and low short interest results in less volatility and more liquidity. The 52-week high at $74.77 is less than two times the 52-week low, at $48.43. This is an example of a thick float and low short interest resulting in more price stability, less volatility and more liquidity.
In contrast, enterprise artificial intelligence software company C3.ai Inc. (NASDAQ: AI) has a thinner float, less than one-tenth of Micron Technology, at 96.1 million shares. The thin float results in less liquidity as the spread between the bid and ask tends to be wider.
The short interest is very high at 32.01%, which makes the stock prone to short squeezes and high volatility. This is evidenced by the difference in the 52-week high of $48.87, being nearly five times the 52-week low at $10.16. This is an example of a stock with a thin float, meaning there are much less than 100 million shares and high short interest, which results in more volatility, less liquidity and more slippage when trying to execute a trade due to wider bid and ask spreads.
Why Learning Float is Valuable
The float has a major impact on price action for all stocks. When you know the float, you can better prepare for what to expect regarding volatility, liquidity and potential short squeezes. Stocks with a low float and high volume always warrant more risk control due to the potential for a short squeeze, wide bid and ask spreads and large price swings. These stocks are risky to place market orders since the price can move quickly. Limited orders are the most prudent way to execute trades on these stocks.
Stocks with thick floats ensure tighter spreads, allowing for less slippage and easy entries and exits. These stocks tend to be more stable and trending since thick floats tend to be accompanied by heavy institutional ownership.
Higher Stock Prices Increase Volatility
As stocks rise in price, volatility tends to increase despite having a high or thick float because investors are hesitant to sell stocks that are moving higher, so there's less stock in circulation. While these shares are still part of the float, investors and institutions tend to hold on to rising stocks, which is selling stocks that fall.
Therefore, the higher a thick float stock rises, the more volatility occurs from less liquidity and widening bid and ask spreads.