Floating Stock
Floating stock is the number of shares available for trading of a particular stock. Low float stocks are those with a low number of shares. Floating stock is calculated by subtracting closely-held shares and restricted stock from a firm’s total outstanding shares.
Closely-held shares are those owned by insiders, major shareholders, and employees. Restricted stock refers to insider shares that cannot be traded because of a temporary restriction, such as the lock-up period after an initial public offering (IPO).
A stock with a small float will generally be more volatile than a stock with a large float. This is because, with fewer shares available, it may be harder to find a buyer or seller. This results in larger spreads and often lower volume.
Definition: Outstanding shares refer to the number of shares of a particular stock that are available for trading. Low float stocks are those with a relatively small number of shares available. Outstanding shares are calculated by subtracting closely held shares and restricted shares from the company's total outstanding shares.
Origin: The concept of outstanding shares originated with the development of the stock market. As companies went public and stock trading became widespread, investors and regulators needed to clarify which shares could be freely traded in the market. In the early days of the stock market, there was no clear concept of outstanding shares, but as the market matured and trading rules were refined, outstanding shares became an important measure of stock liquidity.
Categories and Characteristics: Outstanding shares can be divided into the following categories:
- High Float Stocks: These stocks have a large number of outstanding shares, usually with good liquidity, easy to buy and sell, small spreads, and high trading volumes.
- Low Float Stocks: These stocks have a small number of outstanding shares, usually with poor liquidity, difficult to buy and sell, large spreads, and low trading volumes.
- Liquidity: The more outstanding shares, the better the stock's liquidity and the easier it is to trade.
- Volatility: Stocks with fewer outstanding shares are usually more volatile because the small trading volume makes the price more susceptible to large trades.
Specific Cases:
- Case 1: After an initial public offering (IPO), a tech company has most of its shares held by founders and early investors, which are restricted from trading during the lock-up period. As a result, the company has a low number of outstanding shares, leading to high volatility in its stock price.
- Case 2: A large bank has a significant number of outstanding shares available in the market, making it easy for investors to buy and sell. This results in relatively stable stock prices, low volatility, and high trading volumes.
Common Questions:
- Question: Why does the number of outstanding shares affect stock volatility?
Answer: Stocks with fewer outstanding shares have fewer buy and sell orders in the market, making the price more susceptible to large trades, leading to higher volatility. - Question: How is the number of outstanding shares calculated?
Answer: The number of outstanding shares is calculated by subtracting closely held shares and restricted shares from the company's total outstanding shares.
