Floating stocks can mean a few different things. First, stock-to-flow refers to the number of shares that are publicly available to investors. Second, investors can also speak of the float of a stock, the process by which a company is listed on an exchange, where the public can buy the stock. Therefore, a public stock means a public listing, just like an IPO.
Below are the details of stock float and what it means for investors.
Learn how stock float works
Float is the total number of shares available for purchase and sale by public investors. It can be expressed as an absolute number, such as 10 million shares, or sometimes as a percentage of the company’s total outstanding shares.
For example, a company may have a total of 100 million shares outstanding, but only 75 million of those shares are actually open to the public. This means there are 75 million shares outstanding, or 75% of the total outstanding shares.
- Insider-owned shares
- Stocks held on the company’s own books, such as B. treasury stock
- Limited inventory, which limits the owner’s ability to sell it within a given time period
In short, any stock that is not publicly traded can be delisted.
However, there may be other nuances to classifying a stock as public, and investors may adjust their calculations of downside based on the following considerations:
- Typically more than 5% of outstanding shares when investors own enough shares to file quarterly filings with the SEC
- When large long-term investors or investors classified as insiders hold shares with no intention of selling
The logic behind these calculations is that these investors—much like restricted stock insiders—are less likely to sell their shares and can only do so by informing the public of their sales. As such, investors can expect these stocks to be effectively locked in, at least in the short term.
Why IPOs Matter to Investors
Investors focus on liquidity because it tells them how many shares are available for trading. This information can be critical at critical times, such as B. during a potential bear squeeze. But it’s also valuable because it shows the company’s ownership structure and provides guidance on how to proceed should the company need to raise capital in the future.
Due to limited issuance, stocks with less liquidity tend to be more volatile than stocks with more liquidity, at least in the short term. Investors can demand more shares than are available, pushing up prices. The same dynamic works in reverse. Therefore, if demand for the stock collapses, it could cause the stock price to drop significantly.
Share ownership is a big factor in GameStop’s stock short squeeze in 2021. GameStop repurchased its own stock a year before the squeeze, reducing its free float. At the same time, many investors shorted the stock by shorting it. At some point, low free float and a large number of short sellers caused short sellers to have to buy back more shares than free float, which helped drive the stock price higher.
Second, ownership structures can provide clues to investors’ reactions to events. For example, high free float may indicate that shareholders are more likely to vote for a takeover at a higher price. In contrast, high insider ownership may indicate a different response to investor proposals or shareholder votes. Higher insider ownership may also indicate that the company is more focused on the company’s long-term plans for success than those looking for quick money.
When a company ends up holding shares as treasury stock (perhaps after a share buyback), it can sell those shares in the market to raise money. Approval of new shares may not be required to raise additional capital. These shares become outstanding and count towards free float.
Stock price: high and low
It is actually rare for a company to list all of its stock in an IPO, and it can sell a small portion of its outstanding stock while insiders continue to hold the majority of the stock, which is usually restricted. Robinhood’s IPO, for example, brought about 7% of its stock public.
Reasons for smaller floats can vary, but here are some common motivations:
- The market may not be able to absorb all the outstanding shares, so the underwriters of the IPO decide to sell only a fraction of the shares.
- Insiders may or may not want to sell all of their shares in the IPO.
- Smaller floats can help boost stocks more than larger ones, as IPOs are likely to attract a small group of investors who are more enthusiastic about investing.
It’s worth remembering that a higher price in an IPO can set a psychological range for the stock price, helping to support the price for an extended period of time.
Outstanding vs. Authorized Shares vs. Outstanding Shares
A company’s stock can be divided into different categories based on its status:
- Authorized Shares: Authorized shares represent the number of shares a company can issue under its articles of association. Authorized shares only enable the company to sell shares if needed in the future. A company may own a large number of authorized shares but do not intend to issue them. By reporting the number of authorized shares, the company is helping protect investors from a runaway issuance.
- Outstanding Shares: Outstanding shares indicate how many shares exist. These shares include all shares sold to the public and given to other stakeholders.
- Liquidity: Liquidity represents the number of shares that the general investing public can buy and sell. Among other things, frozen shares held by insiders are excluded. However, if insiders end up selling their shares on the market, those shares will become part of the free float.
In other words, the number of shares authorized is always greater than the number of outstanding shares, which in turn is always greater than the number of outstanding shares.
底線
Float can be particularly important to investors, but is usually more relevant in specific situations and in the short term. In contrast, over the long term, stocks are often driven by the fundamental performance of the underlying company. As Ben Graham famously said, “The market is a voting machine in the short run, but a weighing machine in the long run.”
