What is Floating Stock?
Floating stock is described as the aggregate shares of a company’s stock that are available in the open market. It represents the number of outstanding stock or shares available to the public for trading and does not include closely held shares or restricted stock.
A company with a low number of shares available has a low float, and it may be difficult to find sellers or buyers due to fewer shares available to trade. Hence, a small float stock will usually have more volatility than a large float stock.
The floating stock of a company may vary over time. If a company sells additional shares to secure more capital, the floating stock increases. On the contrary, if the company buys back the shares, the outstanding stock will decrease; hence, the percentage of floating stock will decrease.
- Floating stock signifies the aggregate shares of a stock of a company that is open for the public to trade.
- A large floating stock number reflects a higher availability of shares for trading and makes it easier for investors to buy or sell. Hence, institutional investors are attracted to large floating stocks.
- Floating stock level helps to define a stock’s liquidity and volatility.
Formula for Calculating Floating Stock
The number of outstanding shares of a company does not always represent the floating stock amount. The following formula can be used to find the floating stock figure:
Floating Stock = Outstanding Shares – Restricted Shares – Institution-owned Shares – ESOPs
- Restricted shares cannot be traded until the lock-up period after the initial public offering (IPO) is over. The shares are non-transferable.
- ESOP is an employee stock ownership plan in a company through which the employees get an ownership interest.
For example, a company may have 5 million outstanding shares. However, out of the 5 million shares, 3.5 million shares are owned by some large institutions, management owns 0.5 million shares, and 0.3 million shares are contributed to ESOP.
Hence, the floating stock is only 0.7 million (5 million – 3.5 million – 0.5 million – 0.3 million). The floating stock as a percentage of outstanding stock will be 14% (0.7 million / 5 million = 0.14 * 100).
Features of a Floating Stock
- The floating stock number of a company’s stock helps investors understand how many shares are available to them for trading in the market.
- A higher percentage of floating stock indicates a lower amount of controlled shares or large blocks owned by institutions, management or other insiders..
- The amount of floating stock helps to define a stock’s liquidity and volatility.
- A large floating stock number reflects the high availability of shares for trading. Hence, it makes buying and selling easier, thus attracting a larger pool of investors. Institutional investors seek to invest in large blocks of a company’s stocks with a larger float. However, the share price will not be affected much by these large purchases.
- Companies with a high floating stock, have share prices that are highly sensitive to company or industry news. This volatility and liquidity allows more opportunity to buy and sell the stock..
- The floating stock number reflects the shares of a company’s particular stock owned by the public. Companies may decide to increase or decrease that amount depending on their goals.
Limitations of a Floating Stock
- Floating stock with a small float will have fewer investors since the low availability of stocks discourages investors from investing. This lack of availability may discourage many investors despite the company’s business prospects.
- In an attempt to increase the floating stock, a company may issue extra shares even if additional capital is not required. Such an action will lead to stock dilution, much to the dismay of the existing shareholders.
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