Stock Float: High Float vs. Low Float

Key Takeaways

• A company’s stock float is the number of publicly traded shares issued.

• Subtracting the number of closely held and restricted shares from a company’s total number of outstanding shares determines its float. 

• This number can change over time as market conditions vary.

A company’s floating stock is the total number of publicly traded shares it has in circulation. In other words, it’s the total number of shares of a company that are available to be bought or sold by the general public. 

How a Stock Float Works

Beyond its publicly traded shares, a company can have closely held shares and restricted shares. The former includes those owned by employees, major shareholders or other entities looked upon as being insiders. The latter must be held for a contractually prescribed time duration, such as within a lock-up period following an initial public offering. 

Essentially, a company’s stock float is an expression of the number of its shares available to be bought and sold on the open market at present. A company’s stock float can be expressed in real numbers, such as 20 million shares, or as a percentage of the company’s total outstanding shares. 

Consider for example a company with 200 million outstanding shares of which 100 million are available to the public. This means the company’s float is 100 million, or 50% of its total outstanding shares. 

Stock Float & Market Cap

Float comes into play when calculating a company’s market cap. The total value of all shares — publicly traded, closely held and restricted — is calculated to determine a company’s market cap.  A company’s market can be determined by multiplying the price of its stock by its total number of outstanding shares. As an example, the company’s 200 million outstanding shares cited above, if selling at $50 per share, would return a market cap of $10 billion.

With that said, most stock indexes calculate a company’s free-float market cap. This is determined by multiplying the number of shares in circulation among the general public by the current share price. Going back to our example above, that company’s free float market cap would be $5 billion because only half its shares are available for trading among the general public.

High Float vs Low Float

Companies with a large number of shares available for trading are considered to have a high float, while companies with a low number of shares available for trading are considered low float. Institutional investors (such as mutual funds) usually prefer high floating stocks because a large purchase will generally have a minimal effect on the price if at all. Demand tends to be subdued because there are so many shares in circulation. This makes their pricing more stable, which in turn makes buying and selling easier for investors. 

In contrast, a low float stock can be difficult to acquire, and its price can be more volatile. The price of a low float stock can be affected by a number of different factors. Low float stocks also typically have higher spreads (the difference between how much someone is willing to pay and how much someone else is willing to accept at any particular time) than a comparable high float stock.

This raises the obvious question, “How many shares should be circulating to be considered a low float stock?” Brokers generally consider stocks with fewer than 10 million freely trading shares to be low float. 

What This Means for Investors

The primary relevance of a float for investors is it defines the amount of stock a company has available for trading. The percentage can give an investor some insight into how closely a company is being held. It can also provide some clues as to the volatility of the stock, as well as the mindset of the company’s ownership. Analyzing a float can also provide clues as to how a company might go about raising money in the future should the need arise. Moreover, as covered above, low float stocks tend to experience a greater degree of volatility in the short term. 

This volatility could present opportunities for short-term investors to turn a quick profit, but not for long-term investors. The lack of predictability often makes them too risky for investors with long time horizons. The liquidity of low float stocks can also be an issue, as the bid/ask spread may be higher than an investor would encounter with high float equities. 

Investors considering a low float strategy would do well to keep an eye on trading volumes, any news affecting the company and the float percentage. It is also a good idea to look into why a float is small in the first place. Has there been a stock repurchase recently? Was there a reverse split? These factors can help you determine the potential quality of a low float investment opportunity. 

Portfolio Diversification & Alternative Investments

While significant gains can potentially be made with a low float strategy, maintaining portfolio diversification remains important just the same. Alternative investments have historically been a useful tool in this regard. Traditional asset allocation envisions a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split incorporating 20% alternative assets may make a portfolio less sensitive to public market short-term swings. 

Real property, private equity, venture capital, digital assets and collectibles are among the asset classes deemed alternative investments. Broadly speaking, such investments tend to be less correlated with public equity and offer greater potential for diversification. This can help protect a portfolio during periods of extreme volatility, though it should be noted these opportunities, like all other investment opportunities, do entail a degree of risk. 

Because of the risk potential, alternative assets such as these were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors who bought in at very high minimums — often between $500,000 and $1 million. These accredited investors were thought to be better positioned to withstand the potential for losses.  However, Yieldstreet was founded on the mission to expand access to these types of alternative investments. 

Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary

The term stock float is a reference to the number of shares a company has available for trading among the general public. This figure can help investors determine whether or not a stock represents a good investment for their particular profile. 

High float stocks will usually better serve investors with long time horizons, while those chasing significant gains in a narrow time frame might find them in low float stocks. It’s important to note that while both varieties have associated risks, low float stocks tend to be the more volatile of the two. 

—

All investments involve risk, including the possible loss of capital. There can be no assurance that any product or strategy described herein will achieve any targets or that there will be any return of capital. Past performance is not a guarantee or reliable indicator of future results. Current performance may be lower or higher than the past performance data quoted. Any historical returns, expected or target returns are hypothetical in nature and may not reflect actual future performance. All performance and/or targets contained herein are subject to revision by Yieldstreet and are provided solely as a guide to current expectations.