Stock float is just one of the very significant metric which may help determine the cost of this asset.
While there certainly are always a range of metrics open to rate shares the float remains a significant element when picking shares. Evidently, you can’t be prepared you’ll randomly choose a share to trade. Knowing the underlying causes of the asset cost is vital.
This is the point where the asset float has a significant part.
Of the quantity of stocks which is tradable, the stocks are freely tradeable or esoteric possessed stocks. Inside stocks aren’t frequently looked upward since they have been illiquid.
For the main part, interior stocks are possessed by the workers of the company they work with. The owned stocks aren’t readily tradeable since they come together with restrictions. The marketplaces in enormous don’t bother many about the insider owned stocks.
Free floating stocks are owned and traded by the general investors. In many cases, institutions also own the stocks. These institution owned shares are also held for a long time. Examples of institutions include pension funds, hedge funds that are in for the long haul.
Most of the shares held by institutions do not actively trade the asset as an average investor or a day trader might trade.
- How to calculate marketplace financing
- The free float calculation method
What is a share float?
There are many metrics that traders could follow when it comes to shares. However, the float of the asset or the asset float is also important.
Stock float is important because you can make an educated guess on the volatility and liquidity of the asset.
The float of the asset measures the total amount of stocks that can freely change hands. As you can see the float in a way depicts the liquidity of the marketplaces. The more number of stocks there are to change hands, the greater the liquidity.
Although it is not recommended to trade shares with lower float, the cost is reactive and the asset more volatile during an early period of a company’s life. For such low float shares, a fundamental driven rally creates demand. This in turn makes the cost more expensive.
Stocks with high float tend to be more predictable. This is because due to the large number of float, the liquidity can absorb any big moves. Therefore, while it is common to see 30% or 40% move in a low float asset, this is not very often found with high float shares.
A high float asset, as the name suggests is one that has a high number of freely tradeable shares. Larger companies such as AAPL or FB are examples of shares with high float.
It is usually beneficial and a safe bet to trade shares that have a high float. Usually, a company’s good will is measured based on the float. It reflects the public interest in the asset.
Example of a Floating Stock
To understand floating asset, let’s illustrate this with an example.
A company ABC Inc. has 50,000 stocks outstanding.
Of the stocks outstanding, 5000 are held by its employees, 20,000 stocks are held by institutions and he remaining are held by regular investors.
From this, the asset float is 45,000. This is the sum of the total outstanding stocks minus the stocks held by insiders.
What is the difference between marketplace cap vs. free-float marketplace cap
Market financing or marketplace cap for short is closely linked to free float of the asset. When you research on shares you can see that companies are categorized based on their marketplace financing. Question is whether you should pay attention to this.
Market cap is a measure of a company’s size.
Market cap is measured as the total value of a company’s outstanding stocks of shares. These outstanding stocks include publicly traded stocks as well as restricted stocks that are held by insiders.
In simple words, marketplace cap tells you the size of the company’s valuation.
To calculate marketplace financing you simply take the number of a company’s stocks that are outstanding. Multiply the stocks outstanding by the current asset cost in order to obtain the marketplace cap of the asset.
How to calculate marketplace financing
Let’s illustrate this with a simple example.
Say a company ABC Inc. has a total of 5 million stocks outstanding. If this company is trading at a share cost of $10, you can obtain the marketplace cap by multiplying the stocks outstanding with the asset cost.
In the example above, we obtain $50 million as the marketplace financing of the company.
Within marketplace financing, there are certain classifications. The different categories can vary depending on who you ask. However, marketplace financing is broadly classified into the following:
- Large-cap: Large cap shares have a marketplace value of $10 billion or more;
- Mid-cap: Mid cap shares have a marketplace value between $2 billion and $10 billion;
- Small-cap: Small cap shares have a marketplace value between $250 million and $2 billion;
- Micro-cap: The smaller of all, the micro cap shares have a marketplace value of less than $250 million.
Now that we understand what marketplace financing is we can see the difference. Market cap is based on the total value of the company’s stocks. But a float is the number of the outstanding stocks that are available for general trading by the public.
To rephrase this, marketplace cap measures the total valuation of the company. A float measures the total number of free floating stocks that are available minus the restricted shares.
The free float calculation method
There is also another measure called the free float method of calculation. In the free float calculation method, the marketplace cap excludes stocks that are locked in. The stocks that are locked in are inside stocks that are not available for the general public.
Generally, the free float method of calculating the marketplace cap is widely used. Major indexes such as the Dow Jones Industrial Average and the S&P500 make use of the free float method.
Free float and marketplace cap are important metrics for investors. When combined together, these two values show the total available stocks for the public to trade.
Can the asset cost be manipulated with float?
One of the questions that come to mind is whether one can manipulate the cost of a share based on the float. A reduction in the float can almost immediate raise the cost of asset. This might seem contrary to the notion that higher the float, bigger the cost.
This is not the case however. For example, when risk averse investors are on the short side of the asset, reducing the float can squeeze these investors out of the marketplace.
This research paper of Float manipulation and asset costs gives insight into how firms can expand or shrink the float. The research paper takes a look at Japanese asset listings and looks at the cost impact when firms reduce their float between 0.1% up to 100% for periods of one to three months.
The research paper shows that consistent with the theory, the cost of a share tends to rise when the float is reduced and conversely, the cost of the asset falls when the float is developed.
The returns of the asset are also said to be cross-sectionally related to the reduction in the float.
There is evidence that firms tends to issue equity or redeem their convertible debts when the float is low. The paper follows through showing that firms have strong incentives for manipulating the asset cost via its float.
What is a low float asset?
A low float asset as the name suggests indicates that the number of stocks outstanding are low. For such shares, the daily and average volume tends to be low. The low volumes of such shares lead to volatility and as a result, wide bid and ask costs.
There is a myth that low float shares are mostly shares on the pink sheet or OTCBB marketplace listings.
However, this is not the case. In some cases you can find some micro-cap shares with listings on the main exchanges such as the NASDAQ or the NYSE. A asset can also be low float if for some sense the float reduces relative to its usual average.
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While there is no actual definition, a share is a low float asset which has fewer than 15 million in tradable stocks. It is once again important to understand that stocks outstanding measures all the stocks available. This is inclusive of both tradeable and non-tradeable stocks.
Therefore, stocks outstanding are typically higher when you compare to the float. Stocks that have low marketplace cap and low float are ideal for volatility and cost manipulation. They are also not the ideal shares to trade as they attract higher bid and ask costs.
Can company gain or decrease its float?
The answer to this is yes. Companies can raise or decrease their float in two ways.
A company can raise the float by issuing new stocks and it can reduce the float by announcing purchase back of the stocks. Other examples include a company announcing a share breach which could impact the float.
Insider activity is also one of the factors influencing the float. For example, insiders who usually own options can choose to exercise their option. This can also influence the float. However, for this to occur there needs to be a significant amount of option exercises.
A company can also gain its float by deciding to sell some of the inside stocks. This is done for legitimate reasons such as raising cash, but there could also be ulterior motives. Typically, you can see the float changing when there are some big changes. The trigger for the changes to the float is due to the fundamental drivers such as news events or company reports and rumors.
Low float shares – pros and cons
As you might expect by now, there are pros and cons when it comes to trading shares with a low float.
Let’s talk about the upside before all else!
Because low float shares are volatile, there is a tremendous upside to the asset. Traders who can take a calculated risk on low float shares could end up being with big returns in reward.
Manipulation is however easy when it comes to low float shares with cost action susceptible to large unexpected orders. This is something that investors need to bear in mind.
Despite the inherent risks, traders can find an occasional good trade with tremendous upside potential in low float shares. One of the important things is to look for liquidity.
Low float shares is very risky to hold because they can have violent moves in either direction. With so few stocks available to trade, the impact on supply and demand is significant.
Stocks with low floats also tend to be volatile around fundamental news releases. These include any type of news that is related to the industry or the sector in particular. Liquidity also increases around such events which can give good opportunity for investors to exit the asset after making a good trade.
The disadvantage of trading low float shares on the other hand brings a lot of risk as well. For one, liquidity and the spreads is the biggest deterrent. In a way, trading the low float shares is similar to trading penny shares or micro-cap shares.
Remember the risks of trading with low float shares
While it might seem tempting to trade low float shares due to the potential they have, one needs to be cautious. The potential for generating big results is often one of the factors why some traders prefer to trade low float shares.
Likewise, the risks of being defame and being unable to offload your stakes in such shares is disastrous as well. Sometimes traders end up trading low float shares simply because they didn’t listen to this asset itself.
As a rule, investors and notably afternoon traders will need to be attentive in regards to picking shares. Focusing into this marketplace cap and also the float of this asset takes merely a couple of minutes of energy however it will help save you from making a significant mistake.