If you are a new investor taking your first steps into the stock market, you may have spent much time reading about how stocks function. You may have also come across the term ‘floating stock,’ often mistaken for ‘outstanding shares.’ Simply put, the floating stock is a subset of the total shares outstanding in a company. Let’s take a closer look at what the term means and why it is important.
In simple terms, the floating stock is the total number of company shares available for public trading in the open market. It does not include closely-held shares and other kinds of restricted stock. Closely-held shares are generally held by company insiders like directors, employees, and venture capital investors.
The public does not trade these shares freely in the open market. When the number of publicly available shares in the open market is low, such shares are known as low-float stocks. They generally have low liquidity.
The formula for calculating the floating stock of a company is as follows:
Floating Stock = Total Outstanding Shares - (Closely-Held Shares + Restricted Stock)
Let’s look at an example of how floating stock can be calculated using the above formula. Say a company has 50 lakh outstanding shares, of which the management holds 18 lakh shares, employees own 3 lakh shares via ESOPs, and 2 lakh shares are restricted stock. In that case, the total floating stock will be computed as follows:
= Total Outstanding Shares - (Closely-Held Shares + Restricted Stock)
= 50 lakhs - (18 lakhs + 3 lakhs + 2 lakhs)
= 27 lakhs
Floating stock is important for investors because it can indicate the level of liquidity in a company’s shares. A larger float may indicate higher liquidity since more shares are available for trading. On the other hand, low-float stocks may not be easy to buy or sell. So, before investing in a company, you may want to check its floating stock to get a better idea of its potential liquidity.
A wide bid-ask spread may also accompany a lack of liquidity. This further makes low-float stocks harder to trade. Investors may find it difficult to offload shareholdings that do not have a larger float.
Learning the fundamentals and the ins and outs of the stock market is essential before you invest in stocks and earn gains. Now that you know what floating stock is and why it is important, you are one step closer to understanding the markets in detail. Once you are confident enough to get started, you can invest in the Indian stock market easily. With Fi Money, you can also expand your portfolio to include US stocks.
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Companies float shares for many reasons. It can access new capital, help raise funds for business expansion, and allow existing internal investors to sell their holdings.
Low float stocks are essentially those with a few floating stocks available for trading in public. Low float stocks may have a float ranging from around 10 to 20 million. Some low-float stocks may also have shares in the open market below this range.