What is an Average Daily Float?
The term "average daily float" refers to the dollar amount of checks or other negotiable instruments that are in the process of collection by a bank, financial institution or other entity over a certain period, divided by the number of days in the period. When applied to the stock market, it can also refer to the number of company shares that are actually outstanding and available for trading on the public market on an average daily basis.
Understanding Average Daily Float
As a trading term, the average daily float is a measure of the liquid market for a company's stock. If a company is closely held and only a small portion of the stock is trading in the public markets, it will affect the bid/ask spread and a number of other aspects of how the stock is valued.
- Companies and individuals may use float to earn interest on funds before a check is cleared at their financial institution.
- Float in the banking system as a whole can affect the system’s money supply.
- Any factor that slows the process of clearing checks with the Federal Reserve can cause float in the banking system.
The banking term for float is most commonly applied to banks, although it can also refer to large corporations that have both checks deposited and paid checks outstanding. Some industries rely on float to make a profit. The insurance industry, for example, uses float in this manner. Float in the insurance industry comes about because an insurance company collects premiums before paying losses, and it can hold that money for years before having to pay out on a claim.
Float, as defined by the Federal Reserve, is money that appears in two bank accounts at once, due to a delay in the processing of checks or the transfer of cash.
The insurance company can, therefore, invest its float in such a way as to earn more money for the company. Warren Buffett has famously achieved this by investing Berkshire Hathaway’s float in low-rate government bonds. Bonds are a safe investment, so Buffett doesn’t risk losing the float money by investing it as such, but over time the investment has earned the business extra money.
Calculating Average Daily Float
Average daily float is calculated by averaging the dollar value of float outstanding by the number of days of the month or other given period that amount was outstanding, then dividing it by the number of days in the period. For example, if Company XYZ has $300 of float outstanding for the first 10 days of the month, $450 of float outstanding for the second 10 days of the month, and $230 days of float outstanding for the third 10 days of the month, the average daily float calculation would look like this:
Average Daily Float = ((300x10) + (450x10) + (230x10))/30 = $326.66
This means that, on average over the course of the month, this bank, financial institution, or other entity has access to $326.66 of float each day.
Changes in Average Daily Float Over Time
Average daily float in the banking system as a whole increased during the 1970s due to an increase in the use of checks, high inflation, high interest rates and the common practice of drawing funds from faraway banks in order to take advantage of remote disbursement, or transportation float.
Average daily float reached an all-time high of $6.6 billion in 1979. The Monetary Control Act of 1980 resolved many of the issues that had contributed to high average daily float in the 1970s, while the increasing use of electronic funds transfers in the 1990s reduced average daily float to $774 million in 2000.