Understanding Low-Float Stocks
Table of Contents
Low-float stocks are companies with a relatively small number of shares available for public trading. It doesn’t mean the company has very few shares in total.
A company’s float, or floating shares, are those available after subtracting closely held and restricted shares from all outstanding shares. In some cases, a company has a lower float, meaning there are relatively few shares for the public to trade.
low-float stocks are considered more volatile and have higher spreads. But a company’s float can change owing to various conditions.
Key Points
• Low-float stocks refer to shares with limited availability for public trading, resulting in increased volatility and potential price swings based on market demand changes.
• The float of a stock is calculated by subtracting closely held and restricted shares from the total number of outstanding shares, revealing the shares accessible for trading.
• Various factors contribute to a company’s low float, including control by insiders, family ownership, stock buybacks, and stock-based compensation, each affecting liquidity and volatility.
• Day traders often favor low-float stocks due to their potential for significant short-term gains, but the high volatility also presents substantial risks that require careful evaluation.
• Monitoring news catalysts and technical indicators is essential for trading low-float stocks, as these factors can lead to dramatic price movements and influence trading strategies.
Stock Float: Quick Recap
The float of a stock measures the number of shares of a particular stock. It indicates the number of shares of stock available for trading. The measure doesn’t include closely held shares, those owned by controlling investors, employees, or company owners.
Calculating floating stock requires looking at a company’s balance sheet and taking the total number of shares of a company and subtracting any restricted and closely held shares.
Stock indexes, such as the S&P 500, often use floating stock as the basis for figuring out the market cap (the total value of outstanding shares in dollars) of a company.
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What Are Low-Float Stocks?
A company’s float is the total number of shares outstanding, minus closely held and restricted shares.
Some larger corporations have very high floats in the billions, and investors typically consider a float of 10 to 20 million shares as a low-float. But there are companies with floats of less than one million, and you can find even lower-float stock trading on over-the-counter exchanges (OTC).
Companies with a low-float frequently have a large portion of their equity held by controlling investors such as directors and employees, which leaves only a small percentage of the stock available for public trading. That limited supply can cause dramatic price swings if demand changes quickly.
Because low-float stocks have fewer shares available, investors may have difficulty finding a buyer or seller for them. This may make the stocks more volatile, which appeals to day traders. The bid/ask spread of low-float stocks tends to be high as well.
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Floating Stock Example Calculation
If a trader looks at a company’s balance sheet, they can see how many outstanding shares the company has under the heading “Capital Stock.”
Looking at fictional Company A, the company’s balance sheet shows outstanding shares and floating stock shares:
• 50 million shares outstanding
• 45 million float shares
This is a high-float stock, with 90% of the stock available for trade. By contrast, Company B has:
• 2 million shares outstanding
• 475,000 float shares
This is a 23.75% float, and could serve as a signal for day traders to look at other factors to determine whether they want to invest in the stock.
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Understanding Shares Outstanding
Another stock market term that helps explain low-float stocks is shares outstanding. Shares outstanding refers to the total number of shares issued by a company, including those that can’t be traded.
The float is the number of shares that’s the percentage of the shares outstanding available for public trade. This is known as the float percentage. Companies might have numerous shares outstanding, but only a small percentage of floating stock.
The amount of floating stock a company has typically changes over time, as companies might sell more stock to raise money, or company stakeholders might sell their holdings. If a stock goes through a stock split or reverse split, this will also increase or decrease floating shares.
Benefits of Trading Low-Float Stocks
Essentially, low-float stocks primarily benefit day traders who are interested in earning large profits in a short time.
By their nature, low-float stocks are volatile. There are relatively few low-float stocks in the marketplace, and their prices tend to go up and down easily and quickly. Moreover, every trade of a low-float stock issue can have a larger impact on the value of the stock than it would on a security with a higher float.
For example, when good news hits a security with a limited supply, it doesn’t take much for it to have a huge impact on the share price. A low-float stock can see big gains when demand skyrockets. Conversely, if bad news comes to the same security, its price can nosedive rapidly.
The dramatic volatility in investing in low-float companies, can lead to a greater level of risk. But an experienced and highly skilled day trader might be delighted to take on this volatility challenge in exchange for potential continuous gains in a short trading session.
Importance of Low-Float Stocks
If you’re interested in investing in a particular company, it’s important to understand its stock float. You don’t want to overlook this detail while performing your due diligence on an issuing company.
The size of a stock float can change over time, which would affect the stock’s liquidity and volatility. Stock buybacks, secondary share offerings, insider buying or selling shares, and stock splits (or reverse splits) can cause the number of shares outstanding to change, and thus the float.
6 Reasons for Low-Floating Shares
Low-float stocks tend to have higher spreads and higher volatility than a comparable higher-float stock. You may find it hard to enter or exit positions in stocks that have a low float. What are some specific instances that could account for low-floating shares?
1. Special Purpose Acquisition Companies (SPACs)
Certain shares may be trading at a low float because the company that’s issuing the stock is part of a special purpose acquisition company (SPAC). A SPAC is a corporation formed for the sole purpose of raising investment capital through an initial public offering (IPO).
Typically, experienced business executives in the same industry as the SPAC’s target acquisition become the founders of a SPAC. A SPAC could take as long as a number of years to complete. And, even when the new company does go public, there may be fewer shares available for public purchase because they’re held by founders of the SPAC or other officers and insiders close to the deal.
2. The Company Is Family Operated
Another reason for low-float shares could be that the company is family owned. In these cases, a family likely would own a significant share of the company’s shares and would influence important decisions, like electing a chairman and CEO. In particular, if a family-operated company is small to midsize, there may be few shares left for the public to buy.
In fact, family-owned or operated businesses are all around us — including well-known names like BMW, Samsung, and Wal-Mart Stores. About 35% of all companies in the S&P 500 index are family controlled, and 118 of the top family-owned companies in the world are based in the U.S., according to the 2023 Global Family Business Index.
3. Stock Buybacks
If a company buys back some of its shares, that may affect its float by reducing the number of shares available for trading; there’s even a name for it: float shrink.
Regular share buybacks, along with dividend payments, are two ways that a company may reward shareholders. Another reason for a share buyback could be for a company to gain better control of its strategic initiatives without needing to consult its shareholders.
4. Company Has Donated Shares to Its Charitable Foundation
If a company founder has donated a large percentage of its shares to an associated charitable foundation, this could result in a lower float, if the foundation has held onto the shares which are then excluded from the overall float count.
5. Initial Public Offerings (IPOs)
In another scenario, a company might be involved in an initial public offering (IPO), in which its shares are considered privately held until the IPO is complete. Once the new shares are made publicly available for trade, a stock could be considered low float because a high percentage of shares are still restricted for a period of time.
6. Stock-Based Compensation
Some companies have initiatives that reward their employees with company stock; either as part of an incentive program or combined with their regular pay. A company also could have an equity compensation program in place as a way of rewarding employees, executives, and directors of a company with equity in the business.
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Evaluating Low-Float Stocks
Not every low-float stock represents a good buy, but it is a popular strategy for day traders. To evaluate a low-float stock, day traders often look at several other factors.
High Relative Volume
The relative volume shows a stock’s current volume in comparison to earlier periods in a company’s history. This is important to investors because it can affect a stock’s liquidity. If a stock has low liquidity, traders can potentially get stuck with shares they can’t sell.
They may also find themselves unable to take advantage of news catalysts with a significant buy or sell the move. If a stock’s price changes, but there isn’t a lot of trading volume, it may not be a good pick.
News Catalysts
Positive or negative news about a company frequently makes a low-float stock increase or decrease in a short amount of time.
Day traders keep a close eye on the stock market and corporate news to see which stocks likely would make moves. A news event can cause a low-float stock to move anywhere from 50% to 200% in a single day, as they are in low supply.
Float Percentage
This is the percentage of the total shares of stock available for trading. Each trader has their preferences, but most look for a percentage between 10% and 25%.
How to Trade Low-Float Stocks
When trading a low-float stock, a trader might buy and sell the same stock multiple times in a single day. Then, move on to a different low-float stock the next day in an extreme form of market timing.
Many traders will plan out their profit targets and support and resistance ahead of time and stop losses to reduce risk. As with any trade, traders can look at technical indicators like candlestick charts and moving averages to see whether a stock looks bullish or bearish.
A good strategy pays attention to technical analysis and rather than simply buying or selling based on rumors or news.
Finding low-float Stocks
Finding and evaluating stocks to trade requires some knowledge and experience. Several platforms offer the ability to trade low-float stocks. Some of these platforms allow traders to filter by criteria such as volume and float to find the best opportunities. Traders can look for stocks with a float of less than 50 million and a relatively high volume.
Penny stocks less than $5 are very popular with day traders. Traders can also look to watchlists for ideas about which low-float stocks to trade.
• Reuters’ Free Scanner: Free to register. Users can find low-float stocks by scanning with the filter “float.”
• Trade Ideas: This site has multiple low-float stocks lists for the U.S. market. It highlights stocks that are moving so that traders can capitalize on opportunities.
• Stock Screeners: There are many other stock-screening tools you can use to find low-float stocks — such as Benzinga Pro, which lets you “search and filter stocks by any attribute.”
Some Risks to Know
Every investment comes with risks, but low-float stocks present some particular challenges. Day trading is inherently very risky and can result in significant losses (as well as gains). So, other types of investments are often a better fit for those with a low appetite for risk.
Low-float stocks can have high volatility; their price can change within seconds or minutes. If an investor isn’t careful, knowledgeable, or always on top of it, this volatility could wipe out a large portion of their portfolio. Low-float stocks could also present substantial profit opportunities; traders might see gains of 50% to 200% in a single day.
Looking at both the news and technical indicators is crucial for trading success. Trading low-float stocks requires a daily look at market news, as the stocks that look like a promising trade one day may not be ideal the next.
The Takeaway
The term “low-float,” as it pertains to stocks, refers to the amount of shares available to trade in the public market after the appropriate number of shares are allocated to founders, officers of the company, and other inside investors.
It’s important for investors to be aware of the amount of a company’s low-floating stock, as it can reflect the stock’s liquidity. If a stock has relatively few available issues, it might be harder for traders to sell it.
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FAQ
Is a low-float stock good?
When a company’s stock is considered low float, there are fewer shares available for public trading. That can increase volatility for some investors, while others (like day traders) may be able to leverage changes in the share price.
How important is a stock’s float?
Understanding why a company may have a higher or lower float is an important factor for investors to take into consideration, because it can reveal (or be tied to) other aspects of the company’s management or status.
Are low-float stocks good for day trading?
Low-float stocks can garner huge profits for day traders when a particular industry, sector, or company is in high demand. But when demand shifts, low-float stocks can be risky.
What’s the difference between high- and low-float stocks?
You can find a company’s float by taking the total number of shares outstanding and subtracting the number of shares that are closely held or restricted. If the remainder is a high percentage of the outstanding shares, that’s considered a high-float stock — which can indicate the stock has a certain amount of liquidity.
If the remainder is a small percentage of the outstanding shares, that indicates a low-float stock, which generally has a higher spread, lower liquidity, and may be more volatile.
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