What is a stock float?
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A stock float can mean a couple different things. First, a stock float refers to the number of shares that are publicly available for investors. Second, investors may also talk about floating a stock, and by that they mean the process of listing a company onto an exchange where the general public can purchase shares. So, floating a stock means to bring it public, as in an initial public offering.
Here are the details on a stock float and what it means to investors.
Understanding how a stock float works
A stock float is the total number of shares that are available for public investors to buy and sell. It may be expressed as an absolute figure such as 10 million shares, or it may sometimes be expressed as a percentage of the company’s total outstanding shares.
For example, a company may have 100 million total outstanding shares but only 75 million of those shares may actually be available to the public. That means the float is 75 million or 75 percent of the total outstanding shares.
So what might be excluded from a stock’s float?
- Stock held by insiders
- Shares held on a company’s own books such as Treasury stock
- Restricted stock that limits the ability of the owner to sell it in a given period of time
In short, any share that is not publicly available for trading could be excluded from the float.
But classifying stock as floated may have some other nuances, and investors may adjust their own calculations of the float down based on the following considerations:
- If enough stock is held by an investor to require a quarterly filing with the Securities and Exchange Commission, typically more than 5 percent of the outstanding shares
- If a large long-term investor or one classified as an insider has held the stock and has no intention of selling it
The logic behind these calculations is that these investors – similar to insiders with restricted stock – are not likely to sell their stock and can only do so if they inform the public of their sales. As a result, investors may figure that these shares are effectively locked up, at least in the short term.
Why stock floats are important to investors
Investors pay attention to the float because it shows them how much stock is available for trading. This information can be critical at key times, such as during a potential short squeeze. But it’s also valuable because it shows the ownership structure of the company and gives clues how a company may proceed in the future if it needs to raise money.
Because of the limited issuance, stocks with a smaller float will tend to be more volatile than those with a larger float, at least in the short term. Investors may demand more shares than are readily available, pushing up the price. The same dynamic works in reverse, too. So, if demand for the stock collapses, it could drive the stock price much lower.
The stock float was a huge factor in the 2021 short squeeze of GameStop stock. GameStop had been repurchasing its own stock in the year prior to the squeeze, reducing the float. At the same time many investors were betting against the stock by selling it short. At some point the low float and huge number of short-sellers produced a situation in which short-sellers had to repurchase more stock than was available in the float, helping to cause the stock to squeeze higher.
Second, the ownership structure may give clues as to how investors will react to events. For example, a high public float may indicate a greater likelihood of shareholders voting for a buyout at a higher price. In contrast, high insider ownership may indicate a different response to investors’ proposals or shareholder votes. High insider ownership could also indicate greater alignment with the company’s long-term plans for success, as opposed to those looking for a quick buck.
Finally, if a company holds shares as Treasury stock (perhaps following a stock repurchase), it can sell those shares into the market to raise capital. It may not need to authorize new shares to raise further capital. Those shares become outstanding shares and are counted as part of the float.
Stock float: High vs. low
It’s actually rare for a company to float all its stock in an IPO, and it may sell a small percentage of its outstanding shares while insiders continue to hold a significant portion of the shares, which are often restricted. The Robinhood IPO, for example, floated about 7 percent of its stock.
The reasons for a smaller float may vary, but here are some common motives:
- The market may not be able to absorb all outstanding shares, so the IPO’s underwriters decide to sell only a fraction of the shares.
- Insiders cannot or do not want to sell all their shares as part of the IPO.
- A smaller float may help boost the stock more than a larger float, since the IPO may be able to attract a smaller set of investors who are more excited about the investment.
And it’s worth remembering that a higher price at an IPO can set a psychological range for a stock price, helping support the price over a longer period of time.
Float vs. authorized shares vs. outstanding shares
A company’s stock can be classified into a few different categories depending on its status:
- Authorized shares: Authorized shares indicate how many shares the company could issue according to its charter. Authorized shares merely give the company the ability to sell stock if it needs to do so in the future. A company may have a huge number of authorized shares but have no intention of issuing them. By specifying the number of authorized shares, the company helps protect investors from runaway issuance.
- Outstanding shares: Outstanding shares indicate how many shares are in existence. These shares include any sold to the public as well as any given to other stakeholders.
- Float: The float indicates how many shares are available for the general investing public to buy and sell. It does not include, among other things, restricted stock held by insiders. However, if insiders eventually sell their stock in the market, these shares become part of the float.
To put this another way, the number of authorized shares is always larger than outstanding shares, which in turn is always larger than the number of floated shares.
The stock float can be particularly important for investors to note, but it’s usually more relevant in specific situations and during the short term. In contrast, over the long term, a stock is generally driven by the fundamental performance of the underlying business. As Ben Graham famously noted, “In the short run, the market is a voting machine, but in the long run, it’s a weighing machine.”