What exactly is a company's float?

By Investopedia Staff AAA
A:

The term "float" refers to the regular shares that a company has issued to the public that are available for investors to trade. This figure is derived by taking a company's outstanding shares and subtracting from it any restricted stock. (Restricted stock is stock that is under some sort of sales restriction: for example, stock that is held by insiders and cannot be traded because they are in a lock-up period following an initial public offering.)

A company's float is an important number for investors because it indicates how many shares are actually available to be bought and sold by the general investing public. The company is not responsible for how shares within the float are traded by the public - this is a function of the secondary market. Therefore, shares that are purchased, sold or even shorted by investors do not affect the float because these actions do not represent a change in the number of shares available for trade: they simply represent a redistribution of shares. Similarly, the creation and trading of options on a stock do not affect the float.

Still don't quite understand what a float is? Here's an example:

Say the TSJ Sports Conglomerate has 10 million shares in total, but 3 million shares are held by insiders who acquired these shares through some type of share distribution plan. Because the employees of TSJ are not allowed to trade these stocks for a certain period of time, they are considered to be restricted; therefore, the company's float would be 7 million (10 million - 3 million = 7 million). In other words, only 7 million shares are available for trade.

It should also be noted that there is an inverse correlation between the size of a company's float and the volatility of the stock's price. This makes sense when you think about it: the greater the number of shares available for trade, the less volatility the stock will show because the harder it will be for a smaller number of shares to move the price.

To learn more about this subject, check out The Basics Of Outstanding Shares And The Float.

RELATED FAQS

  1. What is the difference between in the money and out of the money?

    Learn about how the difference between in the money and out of the money options is determined by the relationship between ...
  2. What are some common questions an interviewer may ask during an interview for a position ...

    Discover the world of investment banking and learn what questions are likely during an interview for a position with an investment ...
  3. If a long call is owned on the record date of a stock, is the owner of the option ...

    Learn how holding a long call option does not entitle the holder to a dividend on the underlying stock unless the call is ...
  4. What is the theory of asymmetric information in economics?

    Read a brief overview of asymmetric information theory in economics, the development of its main arguments and why some challenge ...
RELATED TERMS
  1. Exchange Traded Derivative

    A financial instrument whose value is based on the value of another ...
  2. Catastrophe Equity Put (CatEPut)

    Catastrophe equity puts are used to ensure that insurance companies ...
  3. Open Trade Equity (OTE)

    Open trade equity (OTE) is the equity in an open futures contract.
  4. Lloyds Organizations

    An insurance syndicate that bases its organizational structure ...
  5. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank ...
  6. Short Put

    A type of strategy regarding a put option, which is a contract ...

You May Also Like

Related Articles
  1. Options & Futures

    Why Is Best Buy Stock So Volatile?

  2. Stock Analysis

    What Makes Goldman Sachs a Good Bet?

  3. Trading Strategies

    A Guide Of Option Trading Strategies ...

  4. Options & Futures

    Options and Roth IRAs: Do's and Don'ts

  5. Options & Futures

    Trade Covered Calls On High Dividend ...

Trading Center