Floating Stock

The aggregate shares of a stock of a company that is open for the public to trade

What is Floating Stock?

Floating stock is described as the aggregate shares of a company’s stock that are accessible in the open market. It represents the number of outstanding stock or shares accessible to the public for trading.

The floating stock also reflects the interest of investors or the public to invest in a particular company; hence, the floating stock number can be used to compute the goodwill or market value of the company.

 

Floating Stock

 

A company’s stock with a low number of shares 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.

 

Summary

  • 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, investors are attracted to large floating stocks.
  • Floating stock helps to identify 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. The following formula can be used to find the floating stock figure:

 

Floating Stock = Outstanding Shares – Restricted Shares – Institution-owned Shares – ESOPs

 

Where:

  • 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 figures indicate that a greater number of investors are eager to invest. Hence, it helps investors to make investment decisions regarding the company.
  • Floating stock helps to identify 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 more investors. Institutional investors seek to invest in large blocks of a company’s stocks with a larger float. However, the share price is not affected much by the purchases.
  • The liquidity and volatility of floating stock with lesser shares are usually impacted by any news related to the sector or industry. Thus, it provides investors with an opportunity to finalize a good trade and sell or exit the stock.
  • The floating stock number reflects the shares of a company’s particular stock owned by the public. Based on the figure, the company can make decisions on increasing or decreasing the outstanding shares.
  • The floating stock figure also represents a company’s goodwill.

 

Limitations of a Floating Stock

  • Floating stock with a small float can have fewer investors since the lack of stocks discourages investors from investing. The lack of an adequate number of stocks would drive investors away without even identifying the company’s actual potential.
  • 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.
  • It is easy to exploit low floating stocks, with large orders affecting share price movements.

 

Additional Resources

CFI is the official provider of the Capital Markets & Securities Analyst (CMSA)™ certification program, designed to transform anyone into a world-class financial analyst.

In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful:

  • Employee Stock Ownership Plan (ESOP)
  • Institutional Investor
  • Share Class
  • Weighted Average Shares Outstanding

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