A stock float can refer to two different concepts. Firstly, it denotes the number of shares available for public trading. Secondly, “floating a stock” refers to the process of listing a company on an exchange, making its shares available for public purchase, typically through an initial public offering (IPO).
Here are the details on stock float and its implications for investors.
Understanding how a stock float works
A stock float refers to the total number of shares available for public investors to buy and sell. It can be expressed as an absolute figure, such as 10 million shares, or as a percentage of the company’s total outstanding shares.
For example, a company may have 100 million outstanding shares, but only 75 million of those may be available to the public. In this case, the float is 75 million, or 75% of the total outstanding shares.
What might be excluded from a stock’s float?
- Shares held by insiders
- Treasury stock held by the company itself
- Restricted stock that limits the ability of the owner to sell it within a certain period
In short, any shares not publicly available for trading are excluded from the float.
Classifying stock as floated can have nuances, and investors might adjust their calculations of the float based on factors like:
- Significant stock holdings by an investor requiring a quarterly filing with the Securities and Exchange Commission, typically more than 5% of outstanding shares
- Stock held by large long-term investors or insiders with no intention of selling
The rationale is that these shares, similar to restricted stock held by insiders, are unlikely to be sold and are effectively locked up in the short term.
Top stock brokers often specify a company’s float, breaking down the amounts to help investors make informed decisions.
Why stock floats are important to investors
Investors closely monitor the float because it indicates how much stock is available for trading. This information can be crucial, especially during events like a potential short squeeze. Additionally, it provides insight into the company’s ownership structure and potential future actions, such as raising capital.
Stocks with a smaller float tend to be more volatile than those with a larger float due to the limited number of shares available. If investor demand exceeds the available shares, it can drive the price up. Conversely, if demand collapses, the price can plummet.
The stock float played a significant role in the 2021 short squeeze of GameStop stock. Prior to the squeeze, GameStop had been repurchasing its own stock, reducing the float. Simultaneously, many investors were betting against the stock by selling it short. This low float combined with the high number of short-sellers created a situation where short-sellers needed to repurchase more shares than were available, causing the stock price to skyrocket.
The ownership structure of a company can also provide clues about how investors might react to company events. A high public float might suggest a higher likelihood of shareholders supporting an acquisition at a premium price. On the other hand, high insider ownership might indicate different responses to investor proposals or shareholder votes, suggesting a greater alignment with the company’s long-term plans rather than short-term gains.
Lastly, if a company holds shares as Treasury stock, possibly following a repurchase, it can sell those shares into the market to raise capital without needing to authorize new shares. These shares then become outstanding and are counted as part of the float.
Stock float: High vs. low
It’s uncommon for a company to float all its stock during an IPO. Typically, only a small percentage of the total outstanding shares are sold, while insiders retain a significant portion, often restricted. For instance, the Robinhood IPO floated about 7 percent of its stock.
Several reasons might explain a smaller float:
- The market may not be able to absorb all outstanding shares, so the IPO’s underwriters decide to sell only a fraction of them.
- Insiders may be unable or unwilling to sell all their shares as part of the IPO.
- A smaller float can help boost the stock more than a larger float, as the IPO may attract a select group of enthusiastic investors. This strategy can turn a hot IPO into the year’s hottest IPO.
- A higher IPO price can establish a psychological price range, potentially supporting the stock price over a longer period.
Stock float vs. authorized shares vs. outstanding shares
A company’s stock can be classified into several categories based on its status:
- Authorized shares: These are the total number of shares a company is allowed to issue according to its charter. Authorized shares provide the company the flexibility to sell stock if needed in the future. A company might have a large number of authorized shares without any intention to issue them immediately. This specification helps protect investors from excessive issuance.
- Outstanding shares: These represent the total number of shares that currently exist. This includes shares sold to the public and those given to other stakeholders.
- Float: This is the number of shares available for the general public to buy and sell. The float excludes restricted stock held by insiders. However, if insiders eventually sell their shares on the market, those shares become part of the float.
In summary, the number of authorized shares is always greater than or equal to the number of outstanding shares, which in turn is always greater than or equal to the number of floated shares.
In Conclusion
The stock float is particularly important for investors to note, especially in specific situations and in the short term. However, over the long term, a stock’s performance is generally driven by the fundamental performance of the underlying business. As Ben Graham famously stated, “In the short run, the market is a voting machine, but in the long run, it’s a weighing machine.”