One factor to consider when trading stocks is the company’s “float,” simply the number of shares outstanding that are available to trade, less restricted shares. Thus, the float represents all shares of a public company available to trade in the open market. (Restricted shares, or treasury stock, is excluded from the float because it can’t be traded in the open market.)
Floating Shares Explained
When the number of floating shares is high, it typically means that the stock is fairly liquid. It’s the opposite when the float is low; the stock could be illiquid and, in the presence of a catalyst, it could tend to have extreme moves quickly. This is basic supply-and-demand stuff; if market participants want to buy or sell shares of a low-float stock, it’ll drive the price higher, or lower, respectively, causing extreme moves.
What Affects Floating Shares
Floating shares can be affected by a number of things, most notably secondary offerings, stock splits and share-buyback programs.
Secondary offerings are corporate actions in which the company looks to sell shares in the open market to raise capital. Consequently, this dilutes the stock, and the float increases.
Stock splits could increase or decrease the number of shares floating. If a company issues a traditional stock split, the number of shares in the float increases. However, in a reverse stock split, the number of floating shares decreases. Share buybacks are corporate actions in which a company purchases some shares available to trade, which decreases the float.
There are several websites that will keep you in the loop with corporate actions that affect the number of shares floating. For secondary public offerings, refer to Nasdaq’s webpage of upcoming secondaries. Additionally, you can find upcoming stock splits on Nasdaq, here.
When you’re trading or invested in a stock, it’s important to known when the number of floating shares may change. If the float shares increases, there will need to be increased buying or selling pressure to move the stock. On the other hand, if the number of shares floating declines, the stock may experience more extreme moves when the demand for shares to trade hits the reduced pool of what’s available to trade.