What Does Low Float Mean and How Does It Affect Stocks?
Understand how the limited availability of tradable shares affects a stock's market movements and price action.
Understanding financial market terminology is important for comprehending how stocks trade and what influences their price movements. “Stock float” is a key metric offering insights into a company’s shares. This article defines low float, explains its characteristics, describes its impact on market behavior, and details how to identify low float stocks.
Understanding Stock Float
Stock float refers to the number of a company’s shares readily available for trading by the general public, differing from “shares outstanding,” which is the total number of shares a company has issued. Shares outstanding include those held by company insiders, such as executives, directors, and employees, and long-term strategic investors. Shares restricted, held by insiders, or controlled by large, long-term investors who do not actively trade them are subtracted from total shares outstanding to determine the float. Therefore, float represents the supply of shares accessible to public investors. This metric can change due to corporate actions like share repurchases or new share issuances.
Characteristics of Low Float Stocks
A stock has a low float when a small percentage of its total outstanding shares are available for public trading. While there isn’t a universally fixed definition, some consider a float of fewer than 10 million or 20 million shares to be low. This limited supply means a significant portion of the company’s ownership is not actively traded. Several factors contribute to a stock having a low float:
A substantial amount of shares are held by company insiders, such as founders, executives, and employees, who typically do not trade them frequently.
Institutional investors with long-term, non-trading strategies hold large blocks of shares.
Shares are under lock-up agreements, temporarily restricting their sale, often after an initial public offering (IPO).
The company has a smaller total number of outstanding shares.
Market Behavior of Low Float Stocks
The limited supply of shares in low float stocks directly impacts their market behavior, leading to increased price volatility, as even modest changes in buying or selling interest can result in disproportionately large price swings. A relatively small volume of trades can cause significant upward or downward movements in the stock price. Low float stocks often exhibit higher volatility and can experience rapid price appreciation or depreciation, especially with increased trading volume. They can also have lower liquidity compared to stocks with a higher float. Lower liquidity means it is more challenging to buy or sell a large number of shares without affecting the stock’s market price.
Identifying Low Float Stocks
Individuals can determine a stock’s float by accessing information from various financial data sources. Financial websites often present the “float” or “public float” alongside other key metrics for a given stock, typically obtaining data from authoritative sources. Publicly traded companies are required to disclose detailed information about their share structure in filings with the U.S. Securities and Exchange Commission (SEC). Annual reports on Form 10-K and quarterly reports on Form 10-Q are valuable resources. These filings contain information on shares outstanding and restricted shares, allowing investors to calculate the public float by subtracting restricted shares from total outstanding shares. The SEC also uses public float to classify companies for reporting purposes.