What is Floating Stock?

The total number of shares of a company's stock accessible on the open Market is known as floating stock. It refers to the number of outstanding stock or shares accessible for public trade and excludes privately held stock or restricted stock.

A corporation with a low Float has a limited number of shares available for trading, making it difficult to find buyers or sellers. As a result, a small float stock has higher Volatility than a large float stock.

A company's floating stock may change over time. The floating stock increases when a corporation sells additional shares to raise funds. On the other hand, if the corporation buys back shares, the number of outstanding shares will drop, lowering the percentage of floating stock.

A Brief Understanding of Floating Stocks

A firm may have a significant number of outstanding shares but just a small amount of floating stock. For example, assume a corporation has a total of 1 lakh shares outstanding. Large institutions own 50,000 shares, management and insiders own 25,000 shares, and the employee stock ownership plan (ESOP) owns 10,000 shares. As a result, there are only 15K shares of floating stock.

The number of floating shares in a firm might rise or reduce over time. This could happen for several reasons. A firm may, for example, sell extra shares to raise additional Capital, increasing the floating stock. In addition, the floating stock will rise if restricted or tightly held shares become available.

On the other hand, if a corporation decides to conduct a share repurchase, outstanding shares will be reduced. In this circumstance, the fraction of outstanding stock held by floating shares will decrease.

Formula to Calculate Floating Stock

The floating stock quantity is not always equal to the number of outstanding shares of a corporation. However, the floating stock figure can be calculated using the formula below:

Floating Stock = Shares Outstanding – Shares restricted – Shares owned by institution – ESOPs

Here,

• Restricted shares cannot be exchanged until the lock-up period has expired following the Initial Public Offering (IPO). The stock is not transferrable.
• An Employee Stock Ownership Plan (ESOP) refers to the stock ownership plan for an employee of a company in which employees receive a share of the company's ownership.

Floating Stock's Features

• A company's floating stock number informs investors about the number of shares available in the market for them to trade.
• A higher proportion of floating stock suggests that institutions, managers, and other insiders own fewer controlled shares or huge blocks of stock.
• The quantity of floating stock is used to determine the volatility and liquidity of a stock.
• A sizeable floating stock number indicates that there are many shares available for trade. As a result, it facilitates buying and selling, attracting a broader pool of investors. Institutional investors like to buy huge blocks of a company's shares with a high float. These massive acquisitions, however, will have little impact on the stock price.
• Share prices of companies having a higher floating stock are particularly susceptible to Industry news. Because of the stock's volatility and liquidity, there are more opportunities to buy and sell it.
• The floating stock number refers to the number of shares of a company's stock held by the general public. Depending on their objectives, businesses may decide to increase or decrease this amount.

Benefits of Floating Stock

The float of a firm is essential to investors because it reveals how many shares are genuinely available for purchase and sale by the general public. Low float is often a barrier to active trading. Because of the lack of trading activities, investors may find it difficult to initiate or exit positions in the equities with minimal float.

As fewer shares are traded, institutional investors may typically avoid trading in businesses with lower floats, resulting in less liquidity and higher bid-ask gaps. Instead, institutional investors (such as pension funds, Mutual Funds, and insurance firms) will seek out companies with a greater float when purchasing huge blocks of shares. If they invest in companies with a huge float, their significant acquisitions won't have as much of an impact on the stock price.

Floating Stock's Limitations

• Usually investors are discouraged from participating in stocks with a tiny float, a floating stock with a small float will have fewer investors. Despite the company's business prospects, this lack of availability may deter many investors.

• Even if new capital is not necessary, a firm may issue additional shares to increase the floating stock. Stock dilution will result as a result of this action, much to the dismay of existing shareholders.