What Is Floating Stock?
Floating stock refers to the number of shares of a company's stock that are available for trading in the open market. It is a crucial measure for investors as it indicates the liquidity of a stock – how easily it can be bought or sold without significantly impacting its price.
To calculate floating stock, one must subtract closely-held shares and restricted stock from a company's total outstanding shares.
- Closely-held shares: These are shares owned by insiders such as executives, major shareholders, and employees.
- Restricted shares: These are stocks that insiders cannot trade because of specific restrictions, such as a lock-up period following an Initial Public Offering (IPO).
Calculation of Floating Stock
For example, if a company has 50 million shares outstanding, and 35 million shares are owned by large institutions, 5 million by management and insiders, and 2 million by an Employee Stock Ownership Plan (ESOP), the floating stock would be:
[ \text{Floating Stock} = 50,000,000 - (35,000,000 + 5,000,000 + 2,000,000) = 8,000,000 ]
This means that only 8 million shares—16% of the outstanding shares—are actually available for market trading.
Dynamics of Floating Stock
Floating stock is not static; it changes over time due to various factors:
- Issuing New Shares: If a company sells additional shares to raise capital, this increases floating stock.
- Restricted Shares Becoming Available: Once previously restricted shares are released, floating stock increases.
- Share Buybacks: When a company repurchases its own shares, this reduces the number of shares available, thus decreasing floating stock.
- Stock Splits and Reverse Splits: A regular stock split increases floating stock, while a reverse stock split reduces it.
Why Floating Stock Matters
Floating stock is particularly important for investors for several reasons:
- Liquidity: A lower float generally leads to less liquidity, as there are fewer shares to buy or sell. This can make it hard for investors to enter or exit positions without significantly influencing the stock price.
- Volatility: Stocks with a low float tend to experience higher volatility compared to those with a larger float. The limited number of shares can result in wider bid-ask spreads, creating larger price fluctuations.
- Institutional Investment: Institutional investors often avoid stocks with small floats as these offer limited liquidity. Instead, they prefer stocks with larger floats to minimize the impact of their trades on share price.
Special Considerations
The public market dynamics surrounding floating stocks are important to consider:
- The buying and selling of floating shares by investors do not affect the float itself; rather, such actions merely redistribute existing shares.
- The introduction of options or other derivatives does not alter the number of shares available for trading—it impacts the underlying asset's price dynamics and risk profiles instead.
Example in Practice
As of September 2023, General Electric (GE) had approximately 1.088 billion shares outstanding. Within this:
- Insider Ownership: 0.20%
- Institutional Ownership: 75.81%
Calculating the floating stock, we find approximately 260 million shares are available for public trading (1.088 billion - 830 million).
It’s noteworthy that institutional ownership trends can signal market sentiment—falling ownership alongside dropping prices may indicate that institutional investors are offloading shares.
Assessing Floating Stock: Is it Good or Bad?
Floating stock, in itself, is not inherently good or bad; rather, it serves as a significant factor affecting trading strategies:
- Higher Float: Easier entry and exit, generally less volatile.
- Lower Float: Difficulties in trading, often results in higher volatility.
Flotation vs. Float Shrink
- Stock Flotation: Issuing new shares to public markets, helping a company raise capital.
- Float Shrink: Situations like stock buybacks that reduce the number of shares available for trading.
Floating vs. Non-Floating Shares
Floating shares are the ones available for public trading, while non-floating shares comprise those held by insiders and typically not traded in the market.
Conclusion
Understanding floating stock is a cornerstone for investors looking to navigate the equity markets effectively. Traders generally favor stocks with larger floats due to their liquidity and stability in pricing, making it crucial for investors to consider the implications of a stock's float in their trading strategies.