Ever wondered how many shares of a company can actually be bought and sold? This number, known as the stock float, is an important piece of information for any investor.
It goes beyond just a simple count; the stock float reveals how much control insiders have over a company, how easily you can buy or sell shares, and even how wildly the price might swing. In this article, we will break down everything you need to know about stock floats, making it easier to understand investing in stock and trading.
Understanding how a stock float works
Imagine a company decides to sell shares of itself to the public for the first time. This process, called an initial public offering (IPO), creates a public market for the company's stock. However, not all the company's shares are necessarily available for you to buy and sell.
The stock float refers specifically to the number of shares that are actually available for trading on the open market. This doesn’t include shares held by company executives, major shareholders, and the government. These restricted shares aren't freely trading hands, so they don't impact the day-to-day price movements you see on the stock exchange.
Why stock floats are important to investors?
So why should you care about the float stock term? The size of the float can significantly impact a stock's price and liquidity.
- Impact on volatility: A stock with a low float, meaning fewer shares available to trade, tends to be more volatile. With fewer shares ‘floating around’, even small buying or selling pressures can cause bigger price swings.
On the other hand, a stock with a high float is generally more stable because there are more shares available, which helps absorb buying and selling activity. - Impact on liquidity: Liquidity refers to how easily you can buy or sell a stock. A high float usually means there are more buyers and sellers of that stock in the market, making it easier to enter or exit a position in it.
Conversely, low float stocks can be less liquid, making it trickier to buy or sell shares at the desired price.
High float stocks
Pros
- More stable price, with smaller fluctuations due to the larger pool of shares absorbing buying and selling activity.
- Easier to enter or exit positions due to higher liquidity. You are more likely to find a buyer or seller for your shares at a fair price.
Cons
- May offer less potential for explosive growth. Since the price is already less volatile, there's a lower chance of experiencing dramatic price increases.
- Can be less exciting for short-term traders who seek to capitalise on rapid price movements.
Low float stocks
Pros
- Potential for higher returns due to increased volatility. Smaller buying and selling pressures can cause significant price swings, offering opportunities for quick profits if you time the market right.
- Can be attractive to short-term traders who enjoy the fast-paced action of a volatile market.
Cons
- Riskier due to price fluctuations. The same volatility that offers high reward when you invest in stock market also carries high risk, as the price can swing down just as easily as it swings up.
- Buying or selling shares can be difficult. Lower liquidity might mean waiting for a suitable buyer or seller, potentially at a price that's not ideal.
Which float spot is better?
So, which type of stock float is better? The answer, as with most things in investing, depends on your preferences and risk tolerance capacity. Here's a quick guide to help you decide:
- Risk-averse investors: If you like stability and want to protect your investment, high-float stocks may be a better option. They usually have more stable prices and are easier to buy and sell.
- Growth-oriented investors: If you are okay with taking risks to make higher profits, low-float stocks could be for you. However, keep in mind that they can be more unpredictable and volatile.
- Short-term traders: If you enjoy the excitement of short-term trading and want to make quick profits, low-float stocks might be appealing. But remember, short-term trading requires skill and experience to manage the risks effectively.
Beyond the basics: Additional factors to consider
When deciding which stocks to add to your demat account, it is important to look beyond just the stock float. Here are some other things to consider:
- Market capitalisation (market cap): This is the total value of a company's outstanding shares. You can find it by multiplying the share price by the number of outstanding shares. Companies with a market cap over Rs. 20,000 crore (large-cap) usually have higher float numbers because they are well-established.
- Company fundamentals: Before investing, check the company's financial performance, growth potential, and competition. Even if a company has a low float, strong fundamentals might make it a better investment than those with a high float but shaky fundamentals.
- Industry trends: The overall health of the industry a company is in can affect its stock's performance. A low-float stock in a thriving industry might be more volatile because more investors are interested in the sector.
Takeaway
Understanding the float stock meaning and its impact on a stock's behaviour helps you make informed investment decisions. By considering the float size and other factors like market cap, company fundamentals, and industry trends, you can navigate the stock market with more confidence.
Remember, there's no one-size-fits-all approach. Choose stocks with float characteristics that align with your risk tolerance and investment goals. With a well-rounded understanding of the stock float, you can be a more strategic and successful investor.
