top of page

How Float Affects Investment Strategy: Understanding Its Impact on Your Portfolio

Hey good people, its me Cam, and today we're diving into the world of investment strategy and how float affects it. If you're like me, you might have heard the term "float" thrown around but aren't exactly sure what it means. Well, fear not because we're breaking it down for you. We'll be exploring the impact of insider selling, share buybacks, secondary offerings, and lock-up periods on a stock's float and how it can affect its liquidity, volatility, and overall value. So, grab your notepad and get ready to learn how to make more informed investment decisions based on the stock's float. Let's get into it!


What is Float and Why is it Important?


Float is the number of shares available for trading in the market. It is calculated by subtracting the restricted shares (shares held by insiders, employees, or the government) from a company's outstanding shares.


Float is essential because it determines a stock's liquidity. Liquidity refers to how easily a stock can be bought or sold without affecting its price. Stocks with a higher float tend to have higher liquidity, making them easier to buy and sell.


Investors also use float to determine a stock's market capitalization, which is the total value of a company's outstanding shares. Market capitalization is an essential metric that investors use to evaluate a company's overall value.


Types of Float


There are two types of float: public float and institutional float.


Public float is the number of shares available for trading in the market that are not held by insiders, employees, or the government. It is the most commonly used type of float and is essential in determining a stock's liquidity and overall value.


Institutional float is the number of shares available for trading that are held by institutional investors such as mutual funds, hedge funds, and pension funds. Institutional investors typically have a long-term investment horizon and tend to hold onto their shares for an extended period. Institutional float is essential because it can impact a stock's volatility and liquidity.


How to Calculate Float


To calculate float, you need to know a company's outstanding shares and the number of restricted shares.


The formula for float is:


Float = Outstanding Shares - Restricted Shares


For example, if a company has 10 million outstanding shares and 2 million restricted shares, the float would be:


Float = 10 million - 2 million = 8 million


How Float Affects Investment Strategy


Float can impact your investment strategy in several ways. Here are a few ways that float can affect your investment decisions:

  • Liquidity: Stocks with a higher float tend to have higher liquidity, making them easier to buy and sell. This is important because it can impact the price you pay for a stock.

  • Volatility: Stocks with a lower float tend to have higher volatility. This is because a small number of shares available for trading can cause large price swings.

  • Market Capitalization: Market capitalization is an essential metric that investors use to evaluate a company's overall value. Stocks with a higher float tend to have a higher market capitalization.

  • Trading Volume: Float can impact a stock's trading volume. Stocks with a higher float tend to have higher trading volume, which can impact the price of the stock.

  • Institutional Ownership: Institutional investors tend to hold onto their shares for an extended period, which can impact a stock's float. Stocks with a higher institutional float tend to be less volatile and have lower liquidity.

Factors That Affect Float

There are several factors that can impact a stock's float, including:

  • Insider Selling: When insiders, such as executives or directors, sell their shares, it can decrease the stock's float.

  • Share Buybacks: When a company buys back its own shares, it reduces the number of outstanding shares, which can impact the stock's float.

  • Secondary Offerings: When a company issues new shares to the public, it increases the number of outstanding shares, which can impact the stock's float.

  • Lock-Up Periods: When a company goes public, insiders and early investors are often subject to a lock-up period where they cannot sell their shares. Once the lock-up period ends, it can impact the stock's float.

FAQs


Q: Can a company have a negative float?

A: No, a company cannot have a negative float. The float is calculated by subtracting the restricted shares from the outstanding shares, so the lowest possible float is zero.


Q: What is the difference between float and shares outstanding?

A: Shares outstanding refer to the total number of shares that a company has issued and are held by investors. Float refers to the number of shares available for trading in the market.


Q: How does float impact a stock's price?

A: Float can impact a stock's price because it affects the stock's liquidity and trading volume. Stocks with a higher float tend to have higher liquidity and trading volume, which can impact the price.


Conclusion

And that's a wrap on our discussion about how float affects investment strategy. We've covered a lot of ground today, from the basics of float to the impact of insider selling, share buybacks, and secondary offerings on a stock's float. We've also explored how the float can affect a stock's liquidity, volatility, and overall value, and how investors can use this information to make more informed investment decisions. By taking into account factors like trading volume, market trends, and institutional ownership, you can build a profitable investment portfolio and achieve your financial goals. Thanks for tuning in and happy investing!

Comments


bottom of page