What Is Floating Stock?
Floating stock is the overall amount of a company’s stock that is available for sale and purchase in the open market. It deals with the sum of all stocks or shares that are available to the public for both trading and investment with zero restrictions. To understand this further, we’ll be looking at some key terms associated with floating stocks.
Understanding Terms
The terms we’ll look into are “closely-held shares”, “restricted shares”, “outstanding shares”, and “shares outstanding”.
· Closely-held shares: These are also known as insider shares. These shares are strictly for the company’s use and not for external trades.
· Restricted shares: These are simply shares or stocks that are not available to the public market The closely-held shares are also restricted.
· Outstanding shares: These shares are basically what’s left of the company’s shares after an entire trading cycle. Simply put, these are the total number of shares or stocks available for the open market after a given period of the company’s transactions. They are the actual floating stocks.
· Shares outstanding simply refers to the total of all of a company’s stock that is held by the shareholders and investors.
As we have gone through the basics of each of these terms, it is important to know how a company’s floating stocks can be derived. Let’s get right to it.
How A Company’s Floating Stock Can Be Derived Or Calculated?
A company’s floating stock can be derived by subtracting the closely-held shares and the restricted shares from the company’s total outstanding shares. For instance, if the company’s total outstanding shares is 80,000, closely-held shares 30,000, and restricted shares 20,000, it will be given thus; 80,000-30,000+20,000= 30,000(that is, 80,000-50,000=30,000). This means that the floating stock for the company would be 30,000. Quite simple isn’t it? It sure is.
With a knowledge of how a company’s float stock is derived, let’s also get familiar with the types of floating stocks.
Types Of Floating Stock
The types of floating stock are high float stock and low float stock.
· High float stock: A high float stock occurs when the company has more shares available for trade in the market. Here, the stock’s volatility is low which is very favorable for traders in the open market.
· Low float stock: This is the opposite of the high float stock. In this case, the company’s outstanding shares are less as a huge part of these shares are restricted, which means they cannot be traded in the open market, thereby causing unfavorableness for traders and investors in the open market.
From the above explanation, it can be deduced that these two conditions vary, that’s why it is important to know the factors that influence the floating stock, to take the right steps to ensure favorability at various times.
Factors That Influence Floating Stock
The floating stock can be influenced positively or negatively. This means that it could increase or decrease depending on some factors. An increase in the floating stocks could be achieved through acquiring additional shares held by the employees or the company’s management team, making them available for the open market, while a decrease in the floating stocks could be by buying back shares from the public, which could be caused by inflation in the stock market.
Strengths and Weaknesses of Floating Stock
Strengths
· The floating stock helps investors understand the number of shares available for trade in the market.
· The amount of float stock helps the company identify a stock’s level of strength and weakness.
· The number of floating stocks determines their availability in the market, which informs the decisions of investors; the higher the availability, the more they purchase, and vice versa.
· The number of floating stocks reflects the amount owed by the company and the public, thereby making it easy to decide on increasing or decreasing the number of shares available.
Weaknesses
· Floating stocks can be manipulated, thereby misleading traders and investors.
· A company may encounter low sales if it has a low stock float.
· A company with a low stock float is at the risk of folding due to the inability to raise fresh capital for its operations.
Summary
With an overview already established, it is seen that as an investor, there is a high chance of getting substantial profit from floating stocks, however, it is advised to properly understand its cons.
· How Can A Company’s Floating Stock Be Calculated?
It is calculated by removing the restricted shares from the company’s outstanding shares.
· How Many Types Of Floating Stock Are There?
Floating stock is of two types, high and low float stocks.
· What Are Restricted Shares?
These are shares that are not available for trade in the public market.
