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's the difference between binary options and day trading?

    Binary options and day trading are both ways to make (or lose) money in the financial markets, but they are different animals. ...
  2. If a LEAP option is purchased and held for more than 12 months, is the tax treatment ...

    A LEAP (long-term equity anticipation security) is a call or put option that allows the buyer a long-term expiration on the ...
  3. How are share prices set?

    When a company goes public though an initial public offering (IPO), an investment bank evaluates the company's current and ...
  4. If I am looking to get an Investment Banking job. What education do employers prefer? ...

    If you are looking specifically for an investment banking position, an MBA may be marginally preferable over the CFA. The ...
RELATED TERMS
  1. Multibank Holding Company

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

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

    To maximize potential returns for certain levels of risk (while ...
  4. Volatility Smile

    A u-shaped pattern that develops when an option’s implied volatility ...
  5. Nadex

    Nadex stands for the North American Derivatives Exchange, a regulated ...
  6. Volcker Rule

    The Volcker rule separates investment banking, private equity ...
comments powered by Disqus
Related Articles
  1. The Impact Of Sell-Side Research
    Markets

    The Impact Of Sell-Side Research

  2. Analyst Recommendations: Do Sell Ratings ...
    Investing Basics

    Analyst Recommendations: Do Sell Ratings ...

  3. Brokerage Functions: Underwriting And ...
    Brokers

    Brokerage Functions: Underwriting And ...

  4. A Primer On Private Equity
    Fundamental Analysis

    A Primer On Private Equity

  5. Top Things To Know For An Investment ...
    Professionals

    Top Things To Know For An Investment ...

Trading Center