How to Invest in Low Float Stocks for Beginners

Low float stocks are a segment of the market where the “float” refers to shares readily available for public trading, excluding those held by insiders or restricted shares. This limited supply influences how a stock behaves, often leading to significant price changes driven by supply and demand dynamics.

Understanding Low Float Stocks

The “float” of a stock indicates the number of shares actively traded by the public in the open market. This figure is distinct from “shares outstanding,” which represents the total shares a company has issued. Shares held by executives, directors, insiders, or those subject to lock-up periods are subtracted from outstanding shares to determine the float. A stock is considered “low float” when this publicly available supply is relatively small, often fewer than 10-20 million shares.

This limited supply means that even moderate increases in demand can lead to rapid and substantial price movements. Conversely, selling pressure can cause equally sharp declines due to the lack of readily available buyers for a small pool of shares. This dynamic highlights how scarcity amplifies the impact of trading activity.

Low float stocks are known for their higher volatility compared to stocks with a larger float. Price swings of 20%, 50%, or even more in a single trading session are not uncommon. This rapid price change stems from the imbalance between limited supply and fluctuating demand.

Low float stocks may exhibit wider bid-ask spreads, the difference between the highest price a buyer will pay and the lowest price a seller will accept. This wider spread can impact the cost of entering or exiting a position. A stock’s float can also change over time due to factors like insider selling, stock buybacks, or the release of restricted shares.

Identifying Low Float Opportunities

Identifying low float stocks involves using specific metrics and financial tools. A primary criterion is the absolute number of shares in the float, with many traders focusing on stocks having fewer than 10 million shares, and some even targeting those under 5 million. Another metric is the float as a percentage of total outstanding shares, indicating how much of the company’s equity is freely tradable.

Average daily trading volume is another important consideration. While low float stocks inherently have fewer shares, a significant increase in their trading volume compared to historical averages can signal growing interest and potential price movement. Monitoring for higher-than-average trading volume alongside a low float can help identify stocks gaining momentum.

Market capitalization ranges are also often associated with low float stocks, as smaller companies tend to have fewer outstanding shares. Micro-cap companies, typically with a market capitalization under $200 million, and small-cap companies, ranging from $200 million to $2 billion, frequently fall into the low float category. These companies are more likely to have a significant portion of their shares held by insiders, further reducing the public float.

Financial screening tools on reputable financial websites are essential for finding these opportunities. These screeners allow investors to set specific parameters for float size, market capitalization, and average daily volume to generate a list of potential low float candidates. Investors can input desired ranges for float, such as “under 20 million shares,” and combine this with filters for price or volume to narrow down results.

Researching Potential Investments

After identifying potential low float stocks, comprehensive research is a necessary step before making any investment decisions. This due diligence extends beyond simply noting the low float characteristic and delves into the company’s fundamental health. Investors should scrutinize financial statements, including the income statement, balance sheet, and cash flow statement, to understand revenue trends, earnings, and overall financial stability. Analyzing these documents helps assess profitability, liquidity, and cash generation.

Understanding the company’s business model, its products or services, and how it generates revenue is also important. This involves examining the industry in which the company operates and its competitive landscape. Assessing whether the company is a leader in its sector or possesses a competitive advantage provides insight into its long-term viability. Comparing key financial ratios and performance metrics against industry peers can further highlight the company’s relative strength or weakness.

Researching potential catalysts is important for low float stocks, as these events can significantly impact price movements. News announcements, such as product developments, regulatory approvals, or major partnerships, can trigger substantial interest and demand. Earnings reports are particularly impactful, as positive or negative surprises can lead to dramatic price changes. Monitoring upcoming events and recent news flow is important for understanding potential triggers for volatility.

This thorough research process, often referred to as due diligence, helps investors assess the risks and opportunities associated with a low float stock. It allows for a more informed decision by providing a deeper understanding of the underlying business and the factors that could influence its stock price beyond just the limited share supply. Relying solely on the low float characteristic without understanding the company’s fundamentals can lead to misinformed investment choices.

Executing the Investment

Once a low float stock has been thoroughly researched and deemed a suitable investment, the next step involves executing the trade through a brokerage account. The process begins with logging into your online trading platform or contacting your broker. From there, navigate to the trading section and search for the specific stock using its ticker symbol.

When placing an order for a low float stock, selecting the appropriate order type is important due to their inherent volatility. A limit order is often preferred over a market order. A market order instructs the broker to buy or sell shares immediately at the best available current price. This can be disadvantageous in fast-moving markets where the price may fluctuate significantly between the time the order is placed and executed.

A limit order, conversely, allows you to specify the maximum price you are willing to pay for a buy order or the minimum price you are willing to accept for a sell order. The trade will only execute at your specified limit price or a more favorable price. For instance, if you wish to buy a stock currently trading at $10, but only want to pay $9.50, you would set a buy limit order at $9.50. This provides greater control over the execution price, which is beneficial when dealing with the rapid price swings common in low float stocks.

To input a limit order, select the stock, choose “buy” or “sell,” then select “limit order” from the order type options. Specify the quantity of shares and the exact limit price. Some platforms may also offer options for the order’s duration, such as “good till cancelled” (GTC), meaning the order remains active until filled or canceled, or a “day order,” which expires at the end of the trading day. After reviewing all details, confirm the trade, and the order is sent to the market. While a limit order offers price control, there is no guarantee it will be filled if the market price does not reach your specified limit.