What Are Floating Stocks and How to Understand Them?
Floating stocks depict a specific number of shares one possesses in a particular stock. If you have high floating stocks, it means you have a high number of shares and vice versa. To calculate these assets, it is necessary to subtract restricted stocks and closely-held shares from the total number of outstanding shares issued by the company.
In this article, we will give the floating stocks definition and understand how they work.
Floating Stocks Definition
As mentioned earlier, the asset is based on two major components:
- Closely-held shares are the assets held by an individual investor They can also be possessed by the firm’s employees or shareholders.
- Restricted stocks describe the company’s assets that are issued for internal usage only. It means you cannot sell or buy them because of temporary restrictions established by an organisation.
As a rule, smaller floating stocks offer higher volatility, as fewer shares are available to the public. In other words, these assets are harder to identify and purchase. As a result, investors can experience bigger spreads and lower traded volume.
Understanding What Floating Stocks Mean
As a rule, the number of floating stocks does not always depend on the number of outstanding shares. Here is an example. Imagine a firm with 50 million shares. 35 million of them belong to different third-party institutions. 5 million of shares go to the company’s insiders and managers. 2 million shares go to ESOP. The remaining 8 million shares are the floating stocks accounting for only 16% of all outstanding shares issued by a firm.
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On the other hand, it does to mean a company is not able to increase the number of floating stocks when needed. Many different reasons can lead to such increase:
- A company may need to raise additional capital for diversification and scalability. This is where it would sell extra shares.
- With the growth of closely-held shares, there will be more floating stocks available for investors.
The Importance of Floating Stocks
The number of these particular assets will show potential investors the real number of shares available for purchasing. In other words, we can see how many assets the general investing public can buy or sell. Active trading takes place when the float is low. A limited float makes it hard for traders to identify the best market exit position.
Special Things to Consider
Investors should keep in mind that the company never takes responsibility for how the asset is traded. The function mainly refers to the secondary market. It does not matter if investors short, buy, or sell these stocks. None of these transactions will ever affect the float. No matter what you do with floating stocks, the number of shares available for trading is always the same.
Another important thing to consider is the fact that the number of institutionally owned stocks can change. None of the investors are obliged to keep the asset for as much as they can. At the same time, you can still generate specific signals and use the situation to predict the next move. For example, if the share of institutional ownership drops featuring the asset price moving down, it means institutional investors are eager to get rid of these shares or simply dump them. If the institutional ownership increases, it will be followed by the asset accumulation.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.