Floating Stock

Last Updated :

21 Aug, 2024

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Table Of Contents

What is Floating Stock?

Floating Stock is the total number of shares of the company available for trading in the market. It is calculated by subtracting the value of the closely held shares and the value of the restricted stock from the company's total outstanding shares. Generally, 10-25% is considered a good floating rate for a stock.

It is the total number of shares available in the market for trading. In simple terms, it refers to a company's shares that are bought and sold freely by the public without any restrictions. In simple words, it is the shares available in the open market that a company has to trade.

What is Floating Stock?

Floating Stock Explained

Floating Stock indicates the total shares available in the market for the investors. A company with a small float is more volatile than a stock with a large float. Investors tend to invest in stocks that have a higher floating stock due to the availability in the market. When the share float is low, it obstructs active trading due to the market's unavailability or scarcity of the stock. Companies issue equity or exercise their convertible debts when the share float is low.

To ensure the company has control over the available shares to trade in an open market and to avoid a free floating stock situation, they keep a vigilant eye on the total composition of the company’s ownership.

This type of stock of a company is an essential factor for investors as it gives a picture of the available shares to be bought and sold in the open market.

Shares within the float are not in the company's control as the public trades this in the secondary market. So any action like sale and purchase does not affect the floating shares of the company as these changes do not impact the number of shares available in the trade market.

Formula

Let us understand the formula that helps companies get a free floating stock insurance through the discussion below.

Floating Stock = Outstanding Shares –

To calculate a company's floating stock,

Subtract its restricted stock and closely held shares such as those shares employees and significant shareholders own from its total number of outstanding shares

Outstanding shares are those shares that a company issues and sells to investors.

Restricted stock unit is a share that is restricted temporarily from trading because of the lock-up period after an initial public offering. It is the non-transferable stock of a company.

Closely held shares are the shares that are owned by major shareholders, insiders, and employees.

Example

Now that we understand the basics, formula, and its intricate details, let us apply the knowledge into the examples that shall give us a practical outlook of a free floating stock and its related factors.

Example #1

PQR Inc. has 10 million outstanding shares, of which large institutional investors own 5 million shares, and 2 million shares are owned by ABC Inc. The management and insiders own 1 million shares, and 400,000 shares are unavailable as these are part of PQR Inc’s Employee Stock Option Plan (ESOP). This means 1.6 million shares are Floating Stock.

= 10,000,000 – (5,000,000 + 2,000,000 + 1,000,000 + 400,000)

= 10,000,000 – 8,400,000

Float = 1,600,000 shares

The percentage of floating stock out of the total outstanding shares for PQR Inc. is 16%.

Many companies like PQR Inc. will issue additional outstanding shares into the open market to raise more capital; when it does, its floating shares will also increase. But if PQR Inc. decides to exercise a share buyback, it will decrease its outstanding shares and reduce the percentage of shares floating.

Example #2

The world’s second-largest shipping line company, Royal Caribbean Cruises Ltd (RCL), rose 97.52% and added $47.50 per share value year-on-year. A third-party data analytics company estimated that 234.399 million shares of RCL are free floating and the remaining 8. 50% of the company’s shares are closely held.

Additionally, in the second quarter of 2023, the company reported a 3.40% extra growth in revenue than the estimated figure that was released earlier. As a result, the earnings per share or EPS was 15.68% higher than the estimated value.

Advantages

Let us understand the advantages of free floating stocks through the points below.

Share float helps investors understand the total shares available for trading in the open market.
It helps the investor decide whether or not to invest in a company. The higher the percentage of share float higher the number of investors wanting to invest;
Large share float attracts more investors due to the availability of the shares in the market and its ease of borrowing and short selling.
The higher the percentage of floating stock, the higher the number of investors wanting to invest.
Shares Float gives the company a clear picture of how many shares is owned by the public; based on this number, the company can decide whether to increase or decrease the number of outstanding shares.
It helps in identifying the volatility and liquidity of the stock.
It reflects the goodwill of the company.
Any news related to the industry or the sector, in particular, can impact the volatility and liquidity of stocks with low floats, which can give an excellent opportunity for investors to exit or sell the stock after finalizing a good trade.

Disadvantages

Despite the various advantages mentioned above, there are a few factors from the other end of the spectrum that prove to be a disadvantage. Let us understand why companies acquire floating stock insurance through the discussion below.

A stock with a small floating stock can result in investors refraining from investing due to the scarcity of the stock in the market.
It can ward off any investors only because of the number of shares in the market available for trading without recognizing the actual potential of the company.
A company may issue additional shares to increase the floating stock even when the business does not require additional funds, which would result in Stock Dilution, which may dismay the existing shareholders.
It is easy to manipulate low-float stocks with price action influenced by large orders.

Important Points

Below are a few points that one must keep in mind to fully understand the concept and its intricacies.

The bottom line is that active trading is obstructed due to a smaller float making it challenging to sell long positions.
In the above example, institutional investors will usually refrain from investing in companies like PQR Inc.
Since small floats have fewer shares to trade and, therefore, more volatility, smaller floats showcase limited liquidity and wider bid/ask spread.
Institutional investors will look for big floats, so their purchases do not affect the share price.
Typically, a company's floating stocks tend to increase once the shares are issued in the secondary market for business expansion, to make an acquisition, or when employees exercise their stock options.
When a company exercises a share buyback, the outstanding shares in the market reduce, and so do the floating shares.
A stock split increases the total outstanding shares, eventually temporarily increasing the floating stock.
When reverse stock splits are exercised, the outstanding shares would be diminished, thereby reducing the floating shares, which would make it harder to borrow and discourage short selling of the shares.

Floating Stock Vs Outstanding Stocks

Both free floating stocks and outstanding stocks are important for a company. However, the distinction is crucial for investors and analysts in assessing a company's financial health, stock liquidity, and potential price movements.

Floating Stocks

Floating stocks, often referred to as the float, are a subset of outstanding shares. They represent the shares available for trading in the open market, excluding closely held shares by insiders, promoters, or long-term investors.
Floating stocks can be freely bought and sold by investors, and they determine the stock's liquidity and price volatility.
Changes in the float occur when insiders or long-term investors decide to sell their shares in the open market or when new shares are issued to the public.
The float is essential for calculating metrics like liquidity ratios and is a key factor in stock price determination. A low float can lead to higher price volatility, while a higher float often results in more stable prices.

Outstanding Stocks

Outstanding stocks, also known as issued shares, refer to the total number of shares a company has issued to investors, including both common and preferred stock.
They represent ownership in the company and entitle shareholders to voting rights and a portion of the company's profits in the form of dividends if declared.
Outstanding shares can change over time due to events like stock splits, additional issuances, or share buybacks.
They are crucial for calculating metrics like market capitalization and earnings per share (EPS). These are essential for investors and analysts when assessing a company's value and performance.