Float

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DEFINITION of 'Float'

Money in the banking system that is briefly counted twice due to delays in processing checks. Float is created when a bank credits a customer’s account as soon as a check is deposited. However, it takes some time for the check to be received from the payer’s bank. Until the check clears from the payer’s bank, the amount of the check appears in the accounts of both the recipient’s and payer’s banks. 

Float may also refer to the total number of shares available for trading. Float is calculated by subtracting closely-held shares from the total number of outstanding shares.

INVESTOPEDIA EXPLAINS 'Float'

Since float is essentially double-counted money, it can distort the measurement of a nation’s money supply by briefly inflating the amount of money in the banking system. This can complicate monetary policy implementation.

For instance, the Federal Reserve – which processes one-third of all checks in the U.S. – has observed that although the amount of float fluctuates randomly, there are definite weekly and seasonal trends. For example, float usually increases on a Tuesday due to a backlog of checks over the weekend, as well as during the months of December and January because of higher check volume during the holiday season. The Federal Reserve uses these trends to forecast float levels, which are then used in the actual day-to-day implementation of monetary policy.

The Federal Reserve also defines two types of float. Holdover float is caused by delays at the processing institution, typically due to weekend and seasonal backlog. Transportation float occurs due to inclement weather and air traffic delays, and is therefore highest in the winter months.

Technological advances over the years have spurred the adoption of measures that substantially speed up payment and hence reduce float. These include the widespread use of electronic payments, the direct deposit of employee paychecks by companies, and the scanning and electronic presentation of checks (instead of their physical transfer). As a result, float in the U.S. has declined from a record daily average of $6.6 billion in the late 1970s – when it spiked due to high inflation and high interest rates – to only $774 million in 2000. The steady decline in the number of checks written each year, combined with the rapid adoption of innovative and convenient payment services, may make float a thing of the past.

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RELATED FAQS
  1. What months of the year typically have the highest float?

    Float creates a temporary distortion in a nation's money supply by counting the same funds twice. This occurs when checks ... Read Full Answer >>
  2. What is the difference between holdover float and transportation float?

    There are millions of bank deposits made on a daily basis by businesses and individuals. When the bank receives a check for ... Read Full Answer >>
  3. In what ways has technology helped to reduce float?

    Technological advances have reduced float by enabling faster processing of checks. Funds now spend less time waiting for ... Read Full Answer >>
  4. Why does float usually increase at the beginning of the week?

    Float is created by check-processing backlogs in the financial system. Checks await processing from one checking account ... Read Full Answer >>
  5. How do open market operations affect the U.S. money supply?

    Formulating a country's monetary policy is extremely important when it comes to promoting sustainable economic growth. More ... Read Full Answer >>
  6. What exactly is a company's float?

    The term "float" refers to the regular shares that a company has issued to the public that are available for investors to ... Read Full Answer >>
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