What Is Float in Trading?

In trading, the term “float” refers to the number of a company’s publicly available shares for trading on the open market. These shares are typically held by retail investors, institutional investors, and other market participants. 

Float plays a significant role in determining a stock’s liquidity, volatility, and overall trading behavior. Understanding float is crucial for traders and investors, as it can influence stock prices and trading strategies.

What Is Float?

Float is calculated by taking a company’s total outstanding shares and subtracting any restricted shares or those insiders hold. Restricted shares are often issued to executives, employees, or other stakeholders and are not immediately available for trading due to regulations or lock-up periods.

For example, if a company has 10 million shares outstanding, but 3 million are held by insiders and restricted, the float would be 7 million. This means that only 7 million shares are available for public trading.

What Types of Float Are There?

There are generally three types of float to consider when analyzing a stock:

Free Float

Free float, also known as float, represents the number of shares available for public trading. It is the most commonly discussed float type and directly impacts a stock’s trading volume and liquidity.

Restricted Float

Restricted float includes shares unavailable for public trading due to restrictions. These shares are often held by company insiders, employees, or major stakeholders and are subject to lock-up periods or other regulatory restrictions.

Total Shares Outstanding

While not a type of float itself, total shares outstanding represent the sum of all shares issued by a company, including restricted shares and those available for trading. This number provides context for understanding how much of the company’s stock is publicly accessible.

How Does Float Affect Trading?

Float significantly impacts several aspects of stock trading, including liquidity, volatility, and price movements.

Liquidity

Liquidity refers to how easily a stock can be bought or sold without affecting its price. Stocks with a high float generally have greater liquidity, as more shares are available for trading. That liquidity makes it easier for traders to enter and exit positions without causing large price fluctuations.

Conversely, stocks with a low float tend to have lower liquidity. This lower liquidity can lead to wider bid-ask spreads and increased difficulty in executing large trades without affecting the stock price.

Volatility

Stocks with a low float are often more volatile because the limited supply of shares can result in larger price swings. A small number of shares available for trading means that even a modest increase in demand can drive up prices significantly. This volatility can present opportunities for traders seeking short-term gains but comes with higher risk.

By contrast, high-float stocks tend to exhibit less volatility due to the larger pool of shares available. These stocks are typically more stable and attract long-term investors who prioritize consistency over rapid price movements.

Price Movements

Float influences supply and demand dynamics in the stock market. Low-float stocks are more susceptible to sudden price changes because the limited availability of shares amplifies the effects of buying or selling pressure. That is why many low-float stocks experience dramatic price spikes during periods of high demand, such as when positive news or earnings reports are released.

With their larger supply of shares, high-float stocks are less prone to sudden price changes. Their price movements are generally smoother and more predictable, making them appealing to conservative investors.

Float and Trading Strategies

Traders often consider float as part of their broader analysis when developing strategies. Here’s how float impacts various trading approaches:

Day Trading

Day traders frequently target low-float stocks due to their potential for rapid price movements. While the volatility of these stocks can provide opportunities for quick profits, it also requires careful risk management and practice with a day trading simulator to avoid significant losses.

Swing Trading

Swing traders, who hold positions for several days or weeks, may focus on stocks with moderate float levels. These stocks often balance volatility and stability, offering opportunities for medium-term gains.

Long-Term Investing

Long-term investors typically prioritize high-float stocks for their stability and liquidity. These stocks are less prone to extreme volatility, making them suitable for buy-and-hold strategies aimed at steady growth over time.

A Key Trading Concept

Float is a fundamental concept in trading that affects a stock’s liquidity, volatility, and price behavior. By understanding the differences between low-float and high-float stocks, traders and investors can make more informed decisions and tailor their strategies to align with their risk tolerance and goals.

Whether you’re a day trader seeking high-volatility opportunities or a long-term investor prioritizing stability, analyzing float is essential to evaluating potential trades. With careful consideration, float can be a valuable tool for navigating the complexities of the stock market.