Floating Stocks: Meaning, Formula, Benefits and Shortcomings

Floating Stock which is also known as float is a concept that has a profound impact on stock’s performance, volatility, liquidity and overall performance. Floating stocks are the stocks of the company that are available in the open market for regular trading. Floating shares do not include the shares held by insiders or promoters. In the world of finance and investment, it is crucial for investors to make informed decisions about their investments. Let us get to know all about floating stock through this blog and make effective investment decisions.

What is a Floating Stock?

Floating stocks represent the shares of a company that are available for trading in the secondary market. Floating stocks are those which are not held by the insiders of the business and also it does not include the shares that are subject to trading rules and regulations. In simple words, floating stocks are those that are available for purchase or sale by the investors on an everyday basis which also include institutional investors as well as mutual funds and individual traders.

In the open market, floating shares are easily purchased or sold by the investors or traders. The total outstanding shares of a company take all the outstanding shares into account. The total outstanding shares include the shares held by the promoters, insider, executives, employees and institutional investors who own large stakes in the business. Floating shares are available to trade freely in the market by retail investors which does not include the shares held by insiders, promoters, etc.

Formula of Floating Stocks

The total outstanding shares of the company excluding the shares held by insiders represent the floating stock amount. Investors can calculate floating stocks with the given formula:

Floating Stocks = Outstanding Shares – Restricted Shares – Institution owned shares – ESOPs or Closely Held Shares

Restricted shares are the ones that cannot be traded until the lock up period after initial public offerings gets over. ESOP represents the ownership of the stock by an employee through which employees get an ownership interest

Features of Floating Stocks

Understanding floating shares in the market allows shareholders to make their perception about buying or selling the securities in the market. Here are some features of floating stocks that determine how they work.

Price Volatility

The market price of a stock is determined by floating stocks because stocks with smaller floats experience more significant changes in market prices as there are a limited number of shares available in the market for trading, so the prices fluctuate frequently. However, stocks with larger float value tend to have greater liquidity because of which, the prices do not fluctuate much.

Liquidity

Higher liquidity stocks are preferred by shareholders as they are easy to buy or sell in the market without impacting the stock’s price while it is not the same with less liquid stocks. Low liquidity stocks might be costly to execute the trades. A stock’s liquidity can be improved by increasing the number of floating shares.

Insider Ownership

A higher percentage of insider ownership such as the shares held by executives, employees influences the availability of shares to trade in the market. A company with a major portion of closely held shares represents that it has a more stable ownership but limits the public influence on the stock price. If the majority number of shares is held by insiders then it represents the interest of insiders towards the company’s success. This is important information used by the investors to gauge the level of commitment that the insiders have in the business.

Stock Performance

The performance of share prices is highly influenced by the availability of floats in the market. When limited shares are available in the market to trade then a sudden surge in demand of the stock can experience a rapid price appreciation which is known as short squeeze.

Market Perception

The number of floating shares available in the market influences investors’ perception about a stock’s stability and attractiveness. A majority of shares held by insiders gives them the power to fluctuate the prices in a favorable direction restricting retail investors to participate in that particular stock.

Advantages of Floating Stock

A company has many implications of issuing a number of shares in the market. A company has several advantages of floating stocks in the marker which we will get to know below:

Price Stability

If there are enough floating shares in the market then the stock has greater liquidity which means a lot of people can buy or sell the stock without big price swings. Investors like to invest in stocks that do not have drastic price fluctuations.

Investor Attraction

A higher number of floating stocks of a company indicates a strong market confidence and stability which attracts investors as it helps them to acquire large portions without affecting the stock prices.

Market Manipulation

If there is a large number of floating stock available in the market then it becomes difficult for a single entity to manipulate the stock price as retail investors also influence the prices.

Market Efficiency

If a large number of shares are actively traded in the market then the stock prices reflect the actual value, this leads to increase in efficiency of trading.

Shortcomings of Floating Stock

There are potential drawbacks of floating stocks that a company might have to face which should be definitely known by investor to prevent themselves from various risks:

Price Instability

If there are less number of floating shares in the market for trading then stock prices do not remain stable. The stock price can be easily manipulated by large institutions if they have majority stakes in the ownership. This can also be perceived as a lack of confidence in a company’s future prospects.

Loss of Control

Issuing more shares in the market dilutes the ownership of existing shareholders and reduces their control and influence over the company’s decisions.

Lower Earnings per Share

An increased number of outstanding shares in the market dilutes earnings per share which impacts the stock prices as lower EPS are seen negatively by the investors.

Increased Costs

A large number of floating stocks represents a diverse number of shareholders having different interests and perspectives; this can lead to higher administrative costs that might be related to shareholder communication, meetings and regulatory compliances.

Final Thoughts

Float Stocks is an important tool for investors to identify the number of shares held by the public. Investors can make sound decisions by analyzing if the market can be manipulated easily or not. It is one of the basic fundamentals which is to be known by the investors, however technical analysis also plays an important role to identify the price action in the stock market. Technical analysis can be easily learned from the trading in the zone course offered by GTF.

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