What is Floating Stock
Floating stock is the number of shares available for trading of a particular stock. Floating stock is calculated by subtracting closely-held shares and restricted stock from a firm’s total outstanding shares. Closely-held shares are those owned by insiders, major shareholders and employees, while restricted stock refers to insider shares that cannot be traded because of a temporary restriction such as the lock-up period after an initial public offering. A stock with a small float will generally be more volatile than a stock with a large float, apart from having limited liquidity and wider bid-ask spread. Because of these issues, institutional investors seldom invest in low-float stocks. Also known as share float or simply “float”.
BREAKING DOWN Floating Stock
A company may have a large number of shares outstanding, but a fairly limited float stock. For example, let’s say ABC Co. has 50 million shares outstanding, with major stakeholders as follows – Institutions 25 million, XYZ Company 10 million, Management and Insiders 5 million, Employee Stock Ownership Plan (ESOP) 2 million. Floating stock is therefore only 8 million shares (i.e. 50 million – 42 million), or 16% of outstanding shares.
The amount of a company’s floating stock will typically go up over time. This occurs because companies may sell shares in a secondary offering to expand the business or make an acquisition, or periodically when employees exercise their stock options.
Other corporate actions can also have a significant impact on floating shares. A share buyback, for example, decreases the number of outstanding shares, so floating shares as a percentage of outstanding stock will go down. Similarly, while a share split will increase floating shares, which may provide a temporary boost to the stock, a reverse split decreases float and makes it harder to borrow, which is a deterrent to short-sellers.
Why Floating Stock is Important
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. A 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.