What is Floating Stock?

It is the total number of shares available in the market for trading. In simple terms, it refers to a company’s shares that are bought and sold freely by the public without any restrictions. In simple words, it is the shares available in the open market that a company has to trade.

It indicates the total shares available in the market for the investors. A company with a small float is more volatile than a stock with a large float. Investors tend to invest in stocks that have a higher floating stock due to the availability in the market. When the share float is low, it obstructs active trading due to the market’s unavailability or scarcity of the stock. Companies issue equity or exercise their convertible debtsConvertible DebtsConvertible debt is a type of debt instrument that can be converted at the company’s discretion into equity shares. It is a hybrid security since it combines debt and equity features and provides additional benefits to the holder.read more when the share float is low.

Floating Stock Formula

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To calculate a company’s floating stock,

Subtract its restricted stock and closely held shares such as those shares employees and significant shareholders own from its total number of outstanding shares

Outstanding shares are those shares that a company issues and sells to investors.

Restricted stock unit is a share that is restricted temporarily from trading because of the lock-up period after an initial public offering. It is the non-transferable stock of a company.

Closely held shares are the shares that are owned by major shareholders, insiders, and employees.

Example

PQR Inc. has 10 million outstanding shares, of which large institutional investors own 5 million shares, and 2 million shares are owned by ABC Inc. The management and insiders own 1 million shares, and 400,000 shares are unavailable as these are part of PQR Inc’s Employee Stock Option Plan (ESOP). This means 1.6 million shares are 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 stock out of the total outstanding shares for PQR Inc. is 16%.

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

Advantages

  • Share float helps investors understand the total shares available for trading in the open market.It helps the investor decide whether or not to invest in a company. Higher the percentage of share float higher the number of investors wanting to invest;Large share float attracts more investors due to the availability of the shares in the market and its ease of borrowing and short selling.Higher the percentage of floating stock, the higher the number of investors wanting to invest.Shares Float gives the company a clear picture of how many shares are owned by the public; based on this number, the company can decide whether to increase or decrease the number of outstanding shares.It helps in identifying the volatility and liquidity of the stock.It reflects the goodwill of the companyGoodwill Of The CompanyIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company’s net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company’s net identifiable assets from the total purchase price.read more.Any news related to the industry or the sector, in particular, can impact the volatility and liquidity of stocks with low floats, which can give an excellent opportunity for investors to exit or sell the stock after finalizing a good trade.

Disadvantages

  • A stock with a small floating stock can result in investors refraining from investing due to the scarcity of the stock in the market.It can ward off any investors only because of the number of shares in the market available for trading without recognizing the actual potential of the company.A company may issue additional shares to increase the floating stock even when the business does not require additional funds, which would result in Stock Dilution, which may dismay the existing shareholders.It is easy to manipulate low float stocks with price action influenced by large orders.

Important Points to Note

  • The bottom line is that active trading is obstructed due to a smaller float making it challenging to sell long positionsLong PositionsLong position denotes buying of a stock, currency or commodity in the hope that the future price will get higher from the present price. The security can be bought in the cash market or in the derivative market. The course of action suggests that the investor or the trader is expecting an upward movement of the stock from is prevailing levels.read more. In the above example, institutional investors will usually refrain from investing in companies like PQR Inc.Since small floats have fewer shares to trade and, therefore, more volatility, smaller floats showcase limited liquidity and wider’ bid/ask spread.Institutional investorsInstitutional InvestorsInstitutional investors are entities that pool money from a variety of investors and individuals to create a large sum that is then handed to investment managers who invest it in a variety of assets, shares, and securities. Banks, NBFCs, mutual funds, pension funds, and hedge funds are all examples.read more will look for big floats, so their purchases do not affect the share price.Typically, a company’s floating stocks tend to increase once the shares are issued in the secondary market for business expansion, to make an acquisition, or when employees exercise their stock options.When a company exercises a share buyback, the outstanding shares in the market reduce, and so do the floating shares.A stock split increases the total outstanding shares, eventually temporarily increasing the floating stock.When reverse stock splitsReverse Stock SplitsReverse stock split refers to the process of boosting a company’s stock price by reducing the number of its outstanding shares. It is attained by combining some of the existing shares in the market and simultaneously raising their value in the same ratio.read more are exercised, the outstanding shares would be diminished, thereby reducing the floating shares, which would make it harder to borrow and discourage short sellingShort SellingShort Selling is a trading strategy designed to make quick gains by speculating on the falling prices of financial security. It is done by borrowing the security from a broker and selling it in the market and thereafter repurchasing the security once the prices have fallen.read more of the shares.

Conclusion

  • The floating stock of a company is an essential factor for the investors as it gives a picture of the available shares to be bought and sold in the open market.Shares within the float are not in the company’s control as the public trades this in the secondary marketSecondary MarketA secondary market is a platform where investors can easily buy or sell securities once issued by the original issuer, be it a bank, corporation, or government entity. Also referred to as an aftermarket, it allows investors to trade securities freely without interference from those who issue them.read more. So any action like sale and purchase does not affect the floating shares of the company as these changes do not impact the number of shares available in the trade market.It is not affected by the trading of the option.The management can decide whether to issue new stocks, perform stock splits or reverse stock splits based on such stock.

This has been a guide to Floating Stock. Here we provide the definition and formula of floating shares, examples, advantages, and disadvantages. You can learn more about accounting from the following articles –

  • Premium on StockStock DilutionCommon Stock FormulaClass A Shares Definition