What is a Stock's "Float" And Why is it Important?

What exactly does it mean when people refer to a company's "float", and why might the size of a company's float have a direct impact on how the stock trades?

First off, what exactly is a "float"?

To understand what a float is, we first need to explain what "shares outstanding" mean. "Shares outstanding" are the total number of shares that a publicly traded company has. These include shares owned by insiders and large institutions, plus "restricted" shares and the float.

The float represents the shares of the company that are "freely" tradable. Meaning, the shares other than those held by institutions or other owners totalling more than 5% of the company, restricted shares and insider holdings.

Let's take a look at a real world example. Simtek Corp. (SMTK) currently has 16.51 million shares outstanding. If you multiply the number of shares outstanding by the current share price ($2.81), you are left with a total "market cap" of $46.40 million dollars.

Now, Simtek has 10.31 million shares in its float. This means that after backing out shares held by owners that total more than 5% of all shares, restricted shares and insider holdings, we are left with 10.31 million shares. This is the float.

Now why is the "float" important?

The smaller a float, the more volatile a stock can become. If a stock has one million shares in its float and announces really good news, the share price will soar due to their being hardly any shares in the float. If there are hardly any shares in the float, this means that shares are harder to buy and the price to buy shares will go up.

If a stock has a really big float, this would mean that the stock is prone to less explosive moves. A stock with a float of 100 million shares won't rise 100% in one day, but a stock with a float of 1 million shares could.

Filed under: Stock Market Education | General Knowledge




COMMENTS

Comment by Henry on September 17, 2009 @ 2:28 am

I would like some book references on stock float application in trading.

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Comment by avatar_iit on July 22, 2009 @ 9:09 am

very neatly explained..gives a very clear picture from very basic leves...thanks dm

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