Where to Find and Invest in Low Float Stocks

Understanding Low Float Stocks

Understanding the mechanics of how shares are traded is an important aspect of navigating investment opportunities. One such concept is the “float” of a stock, which refers to the number of shares available for public trading.

Float represents the portion of a company’s shares that are held by the public and are readily available for trading on exchanges. It excludes shares held by insiders, such as company executives, employees, or founders, as well as those subject to lock-up agreements or held by long-term institutional investors. These restricted shares do not typically contribute to the stock’s liquidity. The total number of shares a company has issued, known as outstanding shares, includes both the float and these restricted shares.

A “low float” stock is characterized by a relatively small number of shares available for public trading. A stock is generally considered to have a low float if its publicly traded shares represent a small percentage of its total outstanding shares, often cited as being under 10% to 20% of the total. This limited supply of shares available for trading can significantly influence how the stock behaves in the market.

Low float stocks often exhibit heightened volatility compared to their higher float counterparts. Because fewer shares are available, even a modest increase in buying or selling interest can lead to disproportionately large price movements. For example, a small volume of trades can cause a significant percentage change in the stock’s price. News, earnings reports, or market sentiment can have an amplified effect on the stock’s valuation.

The inherent supply-demand imbalance in low float stocks means they can experience rapid price appreciation or depreciation on relatively low trading volume. This potential for quick and substantial price swings often attracts certain investors looking for significant short-term gains. However, this same characteristic also introduces considerable risk, as prices can drop just as quickly as they rise, potentially leading to substantial losses for investors.

Strategies for Identifying Low Float Stocks

Identifying low float stocks primarily involves utilizing stock screeners. These digital platforms allow investors to filter thousands of publicly traded companies based on specific criteria, narrowing down the field to potential candidates. Stock screeners are widely available through various financial news websites and most online brokerage platforms.

When using a stock screener to find low float opportunities, several key metrics should be incorporated. The most fundamental filter is the “float percentage,” which specifies the proportion of a company’s total shares that are publicly available. Investors typically set this percentage to a low threshold, often ranging from 5% to 20%. This helps to pinpoint companies where a significant portion of shares are held by insiders or are otherwise restricted from public trading.

Another important criterion to consider is the “average daily trading volume.” While low float stocks inherently have fewer shares, a minimum level of trading activity is generally desirable to ensure some degree of liquidity. Setting a minimum average daily volume, perhaps above 100,000 shares, can help avoid extremely illiquid stocks that might be difficult to buy or sell without significantly impacting their price.

Market capitalization is also a useful filter to apply in stock screeners, as it helps categorize companies by size. Many low float stocks tend to be smaller, emerging companies, so setting a market capitalization range, such as under $1 billion or $500 million, can help focus the search on this segment. Conversely, filtering out very large-cap companies, which typically have high floats, refines the search to more relevant candidates.

After applying these filters, the stock screener will generate a list of companies that meet the specified criteria. It is important to carefully review these results, looking beyond just the numbers to understand the underlying companies. While the screener identifies potential candidates based on quantitative metrics, further qualitative research is always necessary to assess the viability and risk associated with each stock. This initial screening process serves as a starting point for more in-depth analysis.

Navigating the Investment Process

Once potential low float stock candidates have been identified through screening, the next step involves navigating the practical aspects of investment. This process begins with establishing access to the stock market, which is typically done by opening a brokerage account. Reputable online brokerage platforms are widely available and serve as the primary gateway for individual investors to buy and sell stocks.

Opening a brokerage account generally involves a straightforward application process, which can often be completed online within a few days. Applicants typically need to provide personal identification details, such as a Social Security number, and financial information to confirm their identity and suitability for investing. Most brokerages require investors to be at least 18 years old and have a valid address within the United States. Once the account is approved and funded, usually through an electronic transfer from a bank account, investors gain the ability to place trades.

When executing trades for low float stocks, the choice of order type is particularly important due to their inherent volatility. A “limit order” specifies the maximum price an investor is willing to pay to buy a stock or the minimum price they are willing to accept to sell it. This order type provides control over the execution price, ensuring the trade occurs only at or better than the specified price, which is crucial for volatile assets that can experience rapid price swings. Using a limit order helps mitigate the risk of purchasing shares at an unexpectedly high price or selling them at an unexpectedly low price during periods of market turbulence.

In contrast, a “market order” instructs the brokerage to execute a trade immediately at the best available price. While market orders offer immediate execution, they do not guarantee a specific price, especially in fast-moving or thinly traded securities. For low float stocks, a market order can lead to significant “slippage,” where the actual execution price differs considerably from the price observed just moments before placing the order. This can result in buying at a much higher price or selling at a much lower price than anticipated, making market orders generally less advisable for these types of volatile investments.

Before finally placing a trade, it is important to conduct a final layer of due diligence on the specific company. This involves reviewing recent company news releases, regulatory filings such as 10-K and 10-Q reports with the Securities and Exchange Commission, and any relevant financial statements. Understanding the company’s business model, recent performance, and upcoming events can provide valuable context and help confirm the investment decision. This comprehensive review helps ensure that the investment aligns with an investor’s overall financial strategy and risk tolerance.