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What are float shares in simple terms?
What’s essential to know about this type of stock?
In this article, I will break down the meaning of Float Shares so you know all there is to know about it!
Keep reading as we have gathered exactly the information that you need!
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Table of Contents
What Are Float Shares
In business, float shares refer to the number of shares a company makes available for the general public to purchase.
In other words, the shares that are held by investors and external parties are considered to be part of the company’s float.
For example, if a company has a total of 5 million shares outstanding and 3 million of those shares are available for the general public to invest in, we’ll say that the company has 60% float shares or 3 million float shares.
A company’s float can be expressed in absolute figures or as a percentage.
For example, a company can have 3 million float shares or 60% out of its total shares outstanding.
The shares held by company management, employees, insiders, restricted stocks, and other securities held by the company are not included in float shares.
A stock float is considered to be high when it has a large percentage of its outstanding shares in the hands of the general public.
The higher the stock float, the easier it is for investors to trade the stock as there’s a larger pool of investors generating the demand and supply.
Also, when there is a high float, the stock price tends to be less volatile to surges in demand and supply.
A stock float is considered to be low when a small percentage of a company’s outstanding shares are available for the public to trade.
When the float is low, it means that most of the company’s stock are held by insiders or they may be restricted.
Since there’s a smaller pool of investors able to buy and sell the stock, the stock price will be more volatile.
The stock volatility will be due to the fact that there may not be enough shares in the market to satisfy the demand or supply of the shares.
Why Float Shares Are Important
Investors tend to be interested in determining a company’s “float” or shares held by investors in the general public to better appreciate the company stock.
Investors look at the float to see what percentage of a company’s share is available for the general public to trade versus insiders.
This information can be valuable for seasoned investors as they can predict the possible volatility of the share price and how the company may finance itself in the future.
The share price of a company with a lot of float will be less volatile than a company with a small float.
Also, when the company has little float, it means that most of the company’s stock ownership is held tightly by insiders or individuals close to the organization.
Comparing Float Shares
You may have heard of float shares, authorized shares, and outstanding shares?
What is the difference between all of these different types of stock?
Let’s look at them one by one.
Authorized shares refer to how many shares a company can issue in accordance with its articles of incorporation.
In their charter, companies establish the total number of shares that could be issued.
For example, a company can have 100 million in authorized shares.
This means that the maximum number of shares it can ever issue cannot exceed 100 million shares.
Authorized shares do not mean that the shares have been actually issued.
Outstanding shares refer to the number of shares that a company has actually issued to shareholders.
In other words, every person or company owning stocks is considered to own a portion of the outstanding shares of the company.
Float shares, or just “the float”, refer to the number of shares that are outstanding and that are available to the general public to buy or sell.
When the shares are held by company insiders or internal stakeholders, these shares are not considered to be part of the company’s float.
The more a company has shares in the float, it means that more its outstanding shares are available to the open market participants to buy and sell.
Determining Stock Float In IPO
How does a company determine how many shares to make available to the general public in an initial public offering (IPO)?
A private company looking to go public must determine how many shares it will sell to the public.
Typically, companies will not float all of their stock.
Instead, they will determine the portion based on how many shares the insiders wish to keep, how much capital they want to raise, and how many shares they can expect to sell to the public.
Here are some factors that companies consider when setting their float shares in an IPO:
- Can the market absorb all of the company’s outstanding shares?
- How many shares can the investment bankers reasonably sell?
- How many shares will the insiders want to keep?
- Is the market excited about the IPO?
- How much is the stock being priced in the IPO?
It’s worth noting that a smaller float will help boost the stock price as demand for the stock will be more than supply.
Companies looking to attract investors over a period of time may want the positive impact of rising stock prices after the IPO.
Impact of Float Shares On Stock Price
Depending on the percentage of a company’s shares available to the public, the company’s stock price may be affected.
In certain situations, a company’s stock price can experience what’s called a “short squeeze”.
When the company has a small float, then the stock price can be more volatile.
If there’s a surge in demand for the company stock, then buyers have to offer a higher price to entice those holding on to float shares to sell.
The opposite is also true.
If there is a sudden excess supply of float shares, then the stock price may dip more rapidly.
An example of a short squeeze is what happened to GameStop’s stock in 2021.
Starting in 2020, GameStop started buying back its own stock thereby reducing its float.
However, investors were shorting the stock and betting against it.
Ultimately, the short sellers were forced in buying back the stock but since there were not enough float shares, this squeezed the stock price upward.
Float Shares Example
Let’s look at an example of a company’s float shares to see how it works.
Let’s say Company ABC has a total of 100 million shares authorized for issuance in its charter.
In the course of its development, the company has issued a total of 25 million shares (these shares are the total shares outstanding).
The company employees, management, and insiders own 10 million shares of the company and the general public owns 15 million shares.
This means that 40% of the company is held by company insiders and 60% of the shares outstanding are part of the float.
The general public owns 15 million shares and can trade the shares without the company’s involvement (this is referred to as the secondary market).
Now imagine that the company insiders sell 5 million of their shares to the public.
Now, the company will have 20 million shares in float (or 80% of its outstanding shares).
So there you have it folks!
What are float shares?
In a nutshell, “float shares” refer to regular shares of a company that is available to the public investors to trade.
You can estimate a company’s float by taking its total number of outstanding shares and deducting all restricted stocks along with all stocks held by company insiders.
Knowing how many shares are in float allows investors to determine the size of the secondary market for the shares.
The larger the float, the easier it will be to trade the stock as there are many buyers and sellers.
The smaller the float, the more difficult the stock is to trade as fewer shares are available to the general public.
Now that you know what float shares mean and how they work, good luck with your research!
I hope you enjoyed this article on Float Shares! Be sure to check out more articles on my blog. Enjoy!