What You Should Know About Floating Stocks

Floating stock refers to the number of shares that are available for trading for a specific company

When a company wants to put its share out for trading, it must first determine how much of its shares it wants to put out to the investing public. The term “Floating Stock” is one you should have heard at some point in time.

Simply put, Floating stock refers to the number of shares that are available for trading for a specific company. With the shares put out, the company is no longer responsible for what happens to it.

In other words, it is not involved in how the shares within the float are traded by public investors as it becomes a job for the secondary market.

In order to calculate the floating stock of a company, you simply subtract stocks that are closely-held as well as restricted stocks from the total outstanding shares of a company. To understand this, you need to know the difference between these three terms:

Outstanding Shares

The general definition of outstanding shares or shares outstanding, is that they are common or ordinary stock that is authorized by a company, issued, purchased and held by investors.

While many erroneously think outstanding shares are those traded on the stock market, closely-held stocks and restricted stocks reduce the figure of outstanding stocks to reveal the actual stocks being traded – that is, floating stocks.

Closely-Held Stocks

Closely-held stocks as the name implies refer to is a circumstance in which case a company's common shares are primary owned by one individual owner or by a small group of holders.

It is the opposite of widely held stock where, also as the name implies, many investors own shares in the company. Even where shares outstanding are publicly declared, there is an amount of shares that are held by key investors or owners of the business.

These stocks are not traded in the secondary market with floating stocks.

Restricted Stock

Finally, restricted stocks are stocks that have been constrained. They cannot be traded or transferred until certain conditions are met. They can also be regarded as insider shares that cannot be traded because as a result of a temporary restriction.

One of such restrictions is what is known as a lock-up period which takes place after an initial public offering (IPO) for a brief period of time.

Floating stock is derived by subtracting closely held shares or stocks and restricted stocks form outstanding shares. The floating stock of a company is important for all investors because it defines clearly what shares are really available for trading by the general public.

As expected, the figure for floating stock generally changes over time because shares might be bought back, new shares could be issued and so on. High float stocks refer to the existence of a high number of freely tradeable stocks and low float stocks have a low number of tradeable stocks.

When it comes to active trading, it is pertinent to note that stocks with high floats are most preferred as low float stocks make it harder to trade as there will be restricted people to buy or sell to as a result of the low trading activities involved.

Written by Lawretta Egba