Floating stock refers to the number of shares available for trading in the market of a particular stock.
Floating stock can be calculated by subtracting restricted stock and closely-held shares from a company’s total no. of outstanding shares.
Closely-held shares are the shares owned by insiders, employees and major shareholders.
On the other hand, restricted stock refers to the no. of insider shares that cannot be traded because of a temporary restriction including the lock-up period after an initial public offering is made.
Any firm’s float stock is a relevant number for its investors as it indicates the number of shares that are actually available to be bought and sold by the general investing public.
A firm is not responsible for how the public trades the number of shares in a float as this is a function of the secondary market.
Ergo, the amount and number of shares purchased, sold or even shorted by investors does not affect the floating stock as these actions do not represent a change in the number of shares that are actually available for trade but only a redistribution of shares.
Similarly, the creation and trading of options on a stock do not affect the floating stock of the firm.
A stock with a small float is considered to be more volatile as compared to a stock with a large float. This happens because, with fewer shares available as stock, it may be tough to find a buyer or seller. This results in lower volumes and larger spreads.
Floating Stock Explanation
Floating stock represents the total number of outstanding shares that are open to the public for making an investment.
The number of floating stock can also be used to calculate the market value or goodwill of a firm as it represents the public interest or investors’ interest and willingness to invest in that particular company.
As a matter of fact, a firm can have a larger number of outstanding stocks but has a limit floating stock. The amount of a firm’s floating stock is subjected to rise or fall over time.
This happens as companies tend to sell additional shares in order to raise more capital, or restricted or closely-held shares may come available. On the other hand, a share buyback reduces the number of outstanding stock and as a result floating shares as a percentage of the outstanding stock go down.
Example of Floating Stocks
This example is just for understanding and has nothing to do with real-life scenarios
For instance, Alex Ltd. has 10,000 outstanding shares out of which 5,000 shares are owned by large institutional investors and 2,000 shares are owned by Bajaj Ltd.
The management and employees own 1,000 shares and 400 shares are unavailable as these are part of Alex Ltd’s ESOP.
As a result, 1600 shares are left as the floating stock of Alex Ltd.
Floating stock helps investors in understanding the total shares available for trading in the open market as well as in deciding whether or not to invest in that company.
Higher the percentage of the floating stock, the higher the number of investors wanting to invest.