What is Floating Stock?
Floating stock is the total number of shares of a company freely ‘floating’ or available for trading to the general public. Floating stock is also known as free float or public float.
How to Calculate Floating Stock of a Company?
The formula for calculating free float or floating stock of a company is:
Floating stock = Total outstanding shares of a company – [shares owned by institutional investors + management and insiders + employees via ESOPs].
Understanding Floating Stock
Assume a company, ABC Ltd has 50,000 outstanding shares, out of which 15,000 shares are owned by big institutions and 3,000 shares are owned by the another company PQR Ltd. The management (including the CEO) owns another 5,000 shares. The company has also set aside 5,000 shares to be distributed in the future as ESOPs. In this case, ABC ltd has a floating stock of 22,000 shares.
How to calculate the free float percentage?
The floating stock or free float percentage = Free float or floating stock / total number of outstanding shares.
In the above example, the floating stock percentage is 44%.
This means that of the total stocks issued by the company, only 44% is owned by the general public.
What is the difference between Floating Stock and Outstanding Shares?
Outstanding shares is the total number of stocks issued by a company. Outstanding shares include restricted and unrestricted shares.
Restricted shares are shares issued to insiders, major shareholders and employees via ESOPs.
Unrestricted shares are free float i.e. shares issued for the general public.
In the example of ABC Ltd, the total number of outstanding shares was 50,000 whereas the floating stock was only 22,000.
Why is Floating Stock Important?
Floating stock is used to calculate the market value or goodwill i.e. popularity of a stock. It reflects the interest of the general public in owning the stock.
Low float discourages investors from investing in a particular stock as they are afraid of being stuck with no way out due to poor liquidity of the stock in the market. .
Floating stock gives investors a clear picture of the popularity of a company and the liquidity it enjoys in the market. A high float stock means more opportunity for the investors and traders to trade the stock freely and make profits.
What are the advantages of floating stock?
- Floating stock helps investors understand the goodwill i.e. popularity of a company.
- A high float stock attracts more investors and increases the market value of the stock.
- Floating stock helps investors in deciding whether to invest in the company or not.
- Floating stock helps investors in identifying the liquidity and volatility of a stock.
- High floating stock encourages more investors and traders to trade freely in the stock and make profits.
What are the disadvantages of floating stock?
- It is easy to manipulate the share prices of low float stocks, which can mislead the investors.
- A company may issue new shares just to increase the stock float without actually requiring fresh capital. This leads to unnecessary stock dilution.
- Even if a company is good, if it has a low stock float, investors will avoid the company, with the fear of losing their capital.
- A low stock float reduces the goodwill of the company.
- A low stock float and reduced goodwill affects the company’s chances of raising additional capital to fund its operation or growth.
What are the different types of Stock Float?
There are two types of Floating Stock – High float Stocks and Low float Stocks.
High Float Stocks: If a stock has more than 20 million freely available shares for trading, then it is known as a high float stock.
High float stocks are less volatile and have greater liquidity. High float stocks are typically preferred by institutional and retail investors.
Reliance Industries, TCS and Infosys are some of the high float stocks.
Low Float Stocks: A stock with less than 10-20 million freely available shares for trading is known as low float stocks.
Low float stocks are more volatile as they are not actively traded in the market and it is difficult to find a buyer or a seller at the desired market price. Institutional investors typically stay away from low float stocks.
Factors affecting the floating stock
When stocks are traded in the market, only the ownership of the stock changes. The total floating stock remains the same. While the quantity of floating stock remains the same, it does witness ups and downs.
Floating stock increases when:
- The company issues additional shares to raise fresh capital in the market.
- The shares held by management and employees under ESOPs, become available for trading.
- The company does stock splits.
Floating stock decreases when:
- The company engages in ‘share buyback‘ from the general public.
- The company does a reverse stock split.
- The company decides to increase the ESOP quota.