Float Stocks - Definition & Calculation of Stocks [Guide for New Investors]

What are Float Stocks?

Before understanding about float stocks, it is important to know about the three different terms which are commonly used when referring to the stocks of a company. These terms are outstanding shares, authorized shares and floating shares or floating stocks.

Outstanding shares of a company are the shares which are issued by the company and are held actively by different shareholders. The stock options which are issued to employees fall under the category of Authorized Shares. Employees can convert these stock options into equity shares. However, these stocks are not included in outstanding shares because they are not issued fully.

Now coming to Floating Shares, these stocks include all those shares which are available in the market for trading. A company can ascertain its floating stocks by removing the restricted stocks from outstanding shares and removing all those shares which are closely held. In many large cap companies, a large number of shares are held by insiders, large shareholders and companies’ employees. These shares are not for trading purpose and are usually held for very long terms. There are various restrictions on trading of certain shares sometimes. Such shares fall under the category of restricted shares.

The Basics of Float Stocks

The shares of a company which are available to the common investors for trading and investment purposes without any restrictions are known as float stocks. Companies can be further classified into two categories based on the number of floating stocks. Those companies which have a limited number of floating stocks are known as low float companies. On the other hand, companies with a high number of float stocks are known as large float companies. However, there are chances that a company with a low float may have a large number of outstanding shares.

Let us understand this with an example. Suppose a company AA Chemicals Limited has 10 Crore outstanding shares. Out of these, around 4 Crore shares are held by institutional investors. 3.5 Crore shares are held by the company management and directors. The employees of the company hold 1.5 Crore shares. The remaining 1 Crore are the only shares which are available in the stock market for traders and investors. These shares which are available in the market are the floating stocks of the company.

Importance of Float Stocks

Float stocks are very important for both investors and the company itself. A low float company will have highly volatile stocks with a very high spread. The stocks of such low float companies are usually held by a few entities. These stocks are usually held for very long terms and are not traded frequently. Therefore, it is not easy to enter or exit stocks of such low float companies because there are very few shares available for trading for the common traders and investors.

Companies with a low float thus have a very low liquidity. Any trade which includes large number of stocks of such companies directly affects their price.

Determining the Number of Float Stocks

It is impossible to fix the number of floating stocks of a company. The number of floating stocks keeps on changing. Actions of large investors and stake holders affect the number of float stocks. There can be a rise in the number of float stocks if any stakeholder decides to dilute their stake through an offer for sale or the company issue fresh shares. Company insiders and large investors can also sell their stake in open market, which will also increase the supply of shares.

A company can also decide to buy back its shares. Such a step by the company can lead to a reduction in the number of floating stocks of the company.