The term float refers to the regular shares a company has issued to the public that are available for investors to trade. This figure is derived by taking a company’s outstanding shares and subtracting any restricted stock, which is stock that is under some sort of sales restriction. Restricted stock can include stock held by insiders but cannot be traded because they are in a lock-up period following an initial public offering (IPO).
A company’s float is an important number for investors because it indicates how many shares are actually available to be bought and sold by the general investing public. The company is not responsible for how shares within the float are traded by the public; this is a function of the secondary market. Only changes that affect the number of shares available for trade change the float, not secondary market transactions, nor the creation or trading of stock options.
- The float is calculated by taking a company’s outstanding shares and subtracting any restricted stock.
- It’s an indication of how many shares are actually available to be bought and sold by the general investing public.
- There is an inverse correlation between the size of a company’s float and the volatility of the stock’s price.
How Does Float Work?
Say the TSJ Sports Conglomerate has 10 million shares in total, but 3 million shares are held by insiders who acquired these shares through some type of share distribution plan. Because the employees of TSJ are not allowed to trade these stocks for a certain period of time, they are considered to be restricted. Therefore, the company’s float would be 7 million (10 million – 3 million = 7 million). In other words, only 7 million shares are available for trade.
It should also be noted that there is an inverse correlation between the size of a company’s float and the volatility of the stock’s price. This makes sense when you think about it, as the greater the number of shares available for trade, the less volatility the stock will experience because the harder it will be for a smaller number of shares to move the price.
Shares purchased, sold, or shorted do not affect the float because they are simply a redistribution of shares.
Float vs. Authorized vs. Outstanding Shares
While the float is the number of shares available to the public, the authorized shares are the most shares a corporation can issue. The authorized share count is laid out when the company is created. It’s not required that the company issue all of its authorized shares, however.
Outstanding shares are the number of shares a company has issued. These are all the shares that can be bought and sold, including restricted shares. The number of outstanding and floating shares can vary. Thus, there can be a large difference between outstanding and authorized shares or floating and authorized shares.
Restricted stock is gaining popularity as a form of employee compensation given its ease and straightforwardness compared to stock options.
Why Floating Matters
By identifying the number of restricted shares versus the number of floating, an investor can better understand the ownership structure. That is, how much control insiders have. For example, Company ABC has 10 million shares authorized and 8 million outstanding. A major company insider owns 500,000 shares. Assuming 8 million of the shares outstanding are also in float, this insider selling their shares would have a key impact on the company’s stock price.
However, that effect would be even greater if there are only 6 million of the 8 million shares in the float. As a real-life example, as of July 13, 2022 Amazon (AMZN) had 10.17 billion shares outstanding. But only 9.16 billion were floating.
Image and article originally from www.investopedia.com. Read the original article here.