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. 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. This is because, with fewer shares available, it may be harder to find a buyer or seller. This results in larger spreads and often lower volume.
- Floating stock is the outstanding shares minus those that are restricted, or held by insiders or major shareholders.
- Floating stock will change over time as new shares may be issued, shares may be bought back, or insiders or major shareholders buy or sell the stock.
- Low float stocks tend to have higher spreads and higher volatility than a comparable larger float stock.
Understanding Floating Stock
A company may have a large number of shares outstanding, but limited floating stock. For example, assume a company has 50 million shares outstanding, with other institutions holding 35 million, management and insiders owning 5 million, and the employee stock ownership plan (ESOP) holding 2 million. Floating stock is therefore only 8 million shares (50 million - 42 million), or 16% of the outstanding shares.
Low float is typically an impediment to active trading. This lack of trading activity makes it difficult to enter or exit positions in stocks that have limited float.
The amount of a company’s floating stock may rise or fall over time. This occurs because companies may sell additional shares to raise more capital, or restricted or closely-held shares may come available. On the flip side, a share buyback decreases the number of outstanding shares, so floating shares as a percentage of outstanding stock will go down.
A stock split will increase floating shares. A reverse split decreases float.
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.
Example of Floating Stock
In April of 2019, General Electic (GE) had 8.71 billion shares outstanding. Of this, 0.16% were held by insiders. 58.64% were held by large institutions. Therefore, a total of 58.8% (5.12 billion) is likely not available for public trading, according to data from Thompson Reuters. The floating stock is therefore 3.59 billion shares (8.71 - 5.12).
It is important to note that institutions don't hold a stock forever. The institutional ownership number will change regularly, although not always by a significant percentage. Falling institutional ownership coupled with a falling share price could signal that institutions are dumping the shares. Increasing institutional ownership shows that institutions are accumulating shares.