If you plan to invest in the Indian stock market, you must understand the concept of floating stock. It essentially represents the number of shares available for trading in the stock market. Free float shares as a metric drives price volatility and movement. By tracking them closely, you can anticipate potential swings better.
In this article, we will look at what it means, a few examples of floating shares, and how to interpret top low float stocks.
What is Floating Stock?
Floating stock refers to the shares that are freely available to the public for trading on stock exchanges. It does not include shares held by promoters and government bodies. Furthermore, locked-in shares, Employee Stock Options (ESOPs), and restricted shares are also excluded.
Imagine a company has 1,000 equity shares. The promoters hold 400 shares, and the government holds 100 shares. In this case, the number of free float shares would be 500 equity shares. Investors can only buy and sell these 500 floating shares on exchanges.
Floating Stock vs. Outstanding Shares
As an investor, you must be able to distinguish between floating shares and outstanding shares. Here are a few points of difference between the two.
Scope
Outstanding shares include every equity share a company has issued, whereas floating stock refers only to those available for public trading.
Accessibility
Outstanding shares include restricted and locked-in stock, ESOPs, and shares held by insiders or the government, whereas floating shares exclude any holdings that are not liquid.
Liquidity
The total number of outstanding shares shows the size of the company, but the volume of free float shares is a measure of market liquidity.
Investors often mistake outstanding shares for the actual supply. In fact, floating shares are what drive price action and tell you how easy it is to buy and sell on the stock exchanges. For example, a company with a significant number of outstanding shares and very little floating stock will be illiquid. Buying and selling its shares on the stock exchanges can be very challenging.
How Floating Stock Impacts Stock Price & Volatility?
The relationship between supply and demand dictates how share prices move. When you trade a company with a small floating stock, even a minor increase in demand creates a massive imbalance in the supply and demand dynamics.
Low supply often leads to sharp price movements and high volatility. Because only a few floating shares exist, a sudden increase in demand can force the price to jump rapidly within a short period.
On the other hand, high floating stock leads to stable prices. Since there are large quantities of shares available for trading, a sudden increase in demand can be met without significant shifts in the pricing.
What Are Low Float Stocks?
Companies with only a small percentage of their total equity available for public trading are termed as low float stocks. Such stocks typically experience rapid price shifts due to limited supply.
Short-term traders prefer top low float stocks as they have the potential to deliver quick and high gains. However, they are highly risky for beginners because the lack of liquidity can lead to massive losses during sudden and sharp market reversals.
Why Low Float Stocks Are Highly Volatile?
Low float stocks often create an environment where even small trades cause large shifts. As an investor, you must understand why these assets move so fast.
Limited Supply
Since only a few shares are available for trading, any increase in buying pressure quickly exhausts the available sellers and raises prices sharply.
Price Manipulation
Because the volume is small, wealthy investors can easily control the price movement by buying a large portion of shares.
Sensitive Reactions
Low float stocks show a strong reaction to news or rumours. Even a single headline can spark a massive surge or crash in the prices.
Liquidity Swings
Low liquidity amplifies price swings and may make it difficult to exit your position without compromising on your price.
Risks of Trading Low Float Stocks
Trading low float stocks involves unique challenges that can catch you off guard. If you plan to buy and sell these shares, you must prepare yourself to face the following specific market risks.
Liquidity Risk
Since the liquidity is low, you might find no buyers when you want to sell your holdings. The lack of active market participants can trap your capital in these stocks.
High Bid-Ask Spreads
The bid-ask spread is the gap between the buying and selling prices. For low float stocks, this gap is often very wide. If the bid-ask spread is unfavourable, you will be at a disadvantage right away.
Sudden Reversals
The prices of top low float stocks can crash as fast as they climb if the market reverses suddenly. A gain can vanish in seconds before you have time to react.
Operator-Driven Movements
Large market players often manipulate stocks with low floats. They artificially inflate prices to lure retail investors in before dumping their holdings.
Difficulty Exiting Positions
Selling a large block of shares is hard due to low liquidity. To liquidate your holdings, you might have to push the price down significantly to attract buyers.
Floating Stock: Trader vs Investor Perspective
For traders, floating stock is a vital metric for spotting momentum. You can use it to find breakout points where low supply allows for rapid price surges during short-term trading sessions.
For investors, a large float indicates strong corporate governance and stability. If you wish to invest over the long-term, you must prefer a higher supply to avoid the volatility risk that comes with a small number of free float shares.
Example of Floating Stock
Consider a stock with a total of 10 lakh equity shares. The founders own 8 lakh equity shares, with the remaining 2 lakh equity shares being the floating stock. Now, even a small piece of positive news can lead to a price surge due to the low supply of shares available for trading.
That said, if the founders sell 5 lakh equity shares, the floating stock suddenly increases to 7 lakh equity shares. The increase in supply dampens price volatility. Now, even if there is positive news, the stock is likely to stay fairly stable and predictable. This is because it takes more buying power to move the larger volume.
Top Low Float Stocks – How to Interpret?
When you identify top low float stocks, you must look beyond the small supply of shares and examine the volume, liquidity, and news flow.
Before you trade, you must analyse the daily volume to ensure there is enough activity for you to enter and exit. Then, check the news flow for any recent catalysts that might trigger a sharp move.
It is important to note that high volatility does not automatically mean that top low float stocks will be guaranteed winners. To make an informed trading decision, you must combine float data with price action and volume.
Common Myths About Floating Stock
Many beginners lose money and confidence because they believe the myths about floating stock. Let us bust some common myths about these shares.
Guaranteed Gains
While a limited supply can lead to strong positive price movements, you must not think that low float stocks always go up. The low liquidity can make prices crash just as quickly as it goes up.
Total Selection
Do not assume that floating stock alone is enough for stock selection. It is just one of the many metrics you must study before investing. Other factors, like fundamentals and volume, are more important for selecting the right stock.
High Float Limits
Many beginners believe that high float stocks cannot give good returns. However, it is just a myth. Large entities offer stability and consistent growth over the long term.
How Floating Stock Helps Improve Trading Decisions?
Floating stock data can be used to sharpen your market strategy and protect your capital. Here is a quick look at how it can help.
Better Risk Management
With the knowledge of the total floating shares in an entity, you can adjust your position size accordingly to ensure that market volatility does not cause heavy losses.
Understanding Price Behaviour
Knowing the float of a stock helps you predict whether it will move in small incremental steps or in giant leaps.
Avoiding Liquidity Traps
You can stay away from stocks where low volume might prevent you from selling your shares if the market crashes.
Improving Entry-Exit Planning
Floating shares data allows you to set realistic price targets and stop losses after accounting for bid-ask gaps.
Conclusion – Floating Stock as a Key Market Indicator
Understanding floating stock allows you to navigate market volatility with clarity and anticipate how prices might react to new orders. However, you should never rely on this metric alone when making investment decisions. Instead, you must combine float data with volume, price action, and fundamentals. With Samco Securities, you get a wide range of research tools that can help you analyse various stock-related metrics and make informed decisions.
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