How Does Float Work? Say the TSJ Sports Conglomerate has 10 million shares in total, but 3 million shares are held by insiders who acquired these shares through some type of share distribution plan. Because the employees of TSJ are not allowed to trade these stocks for a certain period of time, they are considered to be restricted. In other words, only 7 million shares are available for trade. It should also be noted that there is an inverse correlation between the size of a company's float and the volatility of the stock's price.
This makes sense when you think about it, as the greater the number of shares available for trade, the less volatility the stock will experience because the harder it will be for a smaller number of shares to move the price. Shares purchased, sold, or shorted do not affect the float because they are simply a redistribution of shares.
Float vs. Authorized vs. Outstanding Shares While the float is the number of shares available to the public, the authorized shares are the most shares a corporation can issue. The authorized share count is laid out when the company is created. Outstanding shares are the number of shares a company has issued. These are all the shares that can be bought and sold, including restricted shares.
The number of outstanding and floating shares can vary. Thus, there can be a large difference between outstanding and authorized shares or floating and authorized shares. Restricted stock is gaining popularity as a form of employee compensation given its ease and straightforwardness compared to stock options. Why Floating Matters By identifying the number of restricted shares versus the number of floating, an investor can better understand the ownership structure.
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. Key Takeaways Floating stock refers to the number of shares a company has available to trade in the open market. To calculate a company's floating stock, subtract its restricted stock and closely held shares from its total number of outstanding shares. Floating stock will change over time as new shares may be issued, shares may be bought back, or insiders or major shareholders may buy or sell the stock.
Low float stocks tend to have higher spreads and higher volatility than a comparable larger float stock. Investors can find it difficult to enter or exit positions in stocks that have a low float. For example, assume a company has 50 million shares outstanding. Of that 50 million shares, large institutions own 35 million shares, management and insiders own 5 million, and the employee stock ownership plan ESOP holds 2 million shares.
This can occur for a variety of reasons. For example, a company may sell additional shares to raise more capital, which then increases the floating stock. If restricted or closely-held shares become available, then the floating stock will also increase. On the flip side, if a company decides to implement a share buyback , then the number of outstanding shares will decrease.
In this case, the floating shares as a percentage of outstanding stock will also go down. A stock split will increase floating shares, while a reverse stock split decreases float. Why Floating Stock Is Important A company's float is an important number for investors because it indicates how many shares are actually available to be bought and sold by the general investing public. Low float is typically an impediment to active trading.
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