A stock float can mean several different things. First, a stock float refers to the number of shares publicly available to investors. Second, investors can also talk about floating a stock, and by that they mean the process of listing a company on a stock exchange where the general public can buy shares. Floating an action therefore means making it public, as in a initial public offering.
Here are the details on a stock float and what it means for investors.
Understand how a stock float works
A stock float is the total number of shares that are available for public investors to buy and sell. It can be expressed as an absolute number such as 10 million shares, or it can sometimes be expressed as a percentage of the total number of outstanding shares of the company.
For example, a company may have a total of 100 million shares outstanding, but only 75 million of those shares may actually be available to the public. The free float is therefore 75 million or 75% of the total outstanding shares.
So what could be excluded from a stock’s float?
- Shares held by insiders
- Shares held on a company’s own books, such as Treasury shares
- Restricted inventory which limits the owner’s ability to sell it within a given time frame
In short, any stock that is not publicly available for trading could be excluded from the float.
But classifying stocks as free float can have other nuances, and investors can adjust their own free float calculations based on the following considerations:
- If enough shares are held by an investor to require a quarterly filing with the Securities and Exchange Commission, usually more than 5% of shares outstanding
- If a large, long-term investor or insider has held the stock and has no intention of selling it
The logic behind these calculations is that these investors – similar to insiders with restricted stock – are unlikely to sell their shares and can only do so if they tell the public about their sales. Investors may therefore believe that these shares are effectively blocked, at least in the short term.
Why stock floats matter to investors
Investors pay attention to free float because it shows them how many shares are available for trading. This information can be critical at key moments, such as during a possible short squeeze. But it’s also valuable because it shows the ownership structure of the business and gives clues as to how a business can proceed in the future if it needs to raise funds.
Due to limited issuance, stocks with smaller free float will tend to be more volatile than those with larger free float, at least in the short term. Investors may demand more shares than are easily available, driving up the price. The same dynamic also works in reverse. So if demand for the stock plummets, it could drive the stock price much lower.
The floating of the shares was a determining factor in the Short 2021 compression of GameStop stocks. GameStop had bought back its own shares in the year before the squeeze, reducing the float. At the same time, many investors were betting against the stock in sell it short. At one point, the low float and large number of short sellers produced a situation where the short sellers had to buy back more shares than were available in the float, which helped push the stock.
Second, the ownership structure can give clues to how investors will react to events. For example, a high public float may indicate a greater likelihood that shareholders will vote for a buyout at a higher price. In contrast, a high level of insider ownership may indicate a different response to investor proposals or shareholder votes. Strong insider ownership could also indicate better alignment with the company’s long-term plans for success, as opposed to those looking for a quick win.
Finally, if a company holds shares as treasury stock (perhaps as a result of a stock buyback), it can sell those shares in the market to raise capital. It may not be necessary to authorize new shares to raise additional capital. These shares become outstanding shares and are counted in the free float.
Stock market float: high or low
It’s actually rare for a company to float all of its shares in an IPO, and it may sell a small percentage of its outstanding shares while insiders continue to own a significant portion of the shares, which are often restricted. The Robinhood IPO, for example, floated about 7 percent of its stock.
The reasons for a smaller float can vary, but here are some common reasons:
- The market may not be able to absorb all the outstanding shares, so IPO underwriters decide to sell only a fraction of the shares.
- Insiders are unable or unwilling to sell all of their shares in the IPO.
- A smaller float may help boost the stock more than a larger float because the IPO may be able to attract a smaller group of investors who are more excited about the investment.
And it’s worth remembering that a higher price in an IPO can set a psychological range for a stock’s price, helping to support the price over a longer period of time.
Floating Shares vs Authorized Shares vs Outstanding Shares
The shares of a company can be classified into several different categories depending on its status:
- Authorized actions: The authorized shares indicate the number of shares that the company could issue in accordance with its charter. Authorized shares simply give the company the ability to sell shares if they need to in the future. A company may have a large number of authorized shares but does not intend to issue them. By specifying the number of shares allowed, the company helps protect investors from uncontrollable emissions.
- Outstanding shares: Outstanding shares indicate the number of existing shares. These shares include all shares sold to the public as well as those given to other stakeholders.
- Float: The free float indicates how many shares are available for the general investing public to buy and sell. It does not include, among other things, restricted stock held by insiders. However, if insiders end up selling their shares in the market, those shares become part of the free float.
That is, the number of shares authorized is always greater than the number of shares outstanding, which in turn is always greater than the number of free float shares.
At the end of the line
Stock float can be particularly important to note for investors, but is generally more relevant in specific, short-term situations. In contrast, over the long term, a stock is generally determined by the fundamental performance of the underlying business. As Ben Graham famous: “In the short term, the market is a voting machine, but in the long term, it is a weighing machine.
