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Why floating shares matter in biotech stocks

Kyle DennisKyle Dennis ·

Most investors are so busy looking at a stock’s market action that they don’t take a serious look at the stock’s float. That’s a mistake because the number of floating shares can give you a hint of a biotech stock’s potential volatility.

Floating shares defined

With a publicly-traded company, floating shares — “float” in trader-speak — refers to the number of shares issued that can be traded by market participants. The float equals its total number of shares minus any restricted stock.

Why floating shares matter

A low amount of floating shares indicates that a stock could be subject to extreme moves in the event of a catalyst. In biotechs, I consider a stock to be “low float” if the number of floating shares is 50 million or less, and I typically trade stocks with a float ranging from 10 million to 100 million. When a stock has floating shares in this range — even if it is on the low end — it typically has sufficient liquidity.

By comparison, If only 500,000 shares are available to trade, the stock is inherently less liquid, and bid-ask spreads can get wide; the stock could rise or fall significantly if a market participant takes the ask or hits the bid, respectively.  

Let’s take a look at an example.

Cara Therapeutics Inc. (CARA) had a float of 26.85 million shares, which I would consider a low float. Here’s a look at some statistics provided by Morningstar.

Since the stock has a “low float,” CARA could potentially see extreme moves.

Thus, when the company had a negative catalyst this summer when it announced top-line results from its Phase IIb trial of oral CR845 in chronic pain patients with osteoarthritis of the hip or knee, the stock price plummeted.

Combine a catalyst with a low float and you get to see the law of supply and demand in action; in this case, traders were looking to sell, but there was low demand for the stock. When this happens, stock prices tend to fall fast.

Source: TradingView

As you can see from this chart, CARA shares plummeted nearly 40% after the announcement.

The bottom line

When you’re trading a stock, examine the float because it may impact the volatility of your position. If you don’t want to susceptible to significant drops, look for biotech stocks with a high number of floating shares. However, if you want some volatility, and want to potentially generate a high degree of profits, factor lower floats into your decision-making process.

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  Kyle Dennis runs Kyle Dennis’ Biotech Breakouts (biotechbreakouts.com). He is an event-based trader, who prefers low-priced and small-cap biotech stocks.  

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