Ultimate Guide To Understanding Stock Floats

Thorough research and analysis for any stock involves both fundamental and technical analysis. Fundamentals analysis involves studying the business operations including financial reports, press releases, industry trends and performance metrics. Technical analysis involves reviewing the price action of the underlying stock including pattern set-ups, triggers, trends, support and resistance levels. However, many investors and traders alike overlook a key structural component of publicly traded stocks that has a material and influential impact on price action and fundamental valuations.

Understanding A Stock’s Share Structure

All U.S. publicly listed companies have a basic stock share structure as regulated by the  Security and Exchange Commission (SEC). When companies issue stock, they are either free trading or restricted securities.

Free trading shares are common stock valued by the price they are last traded at on the exchanges. They can be bought and sold on the public exchanges at the national best bid offer (NBBO) price during and after market hours through a licensed broker-dealer platform.

Restricted shares are prohibited from being traded or transferred, until restrictions are lifted by meeting certain eligibility requirements. Restricted stock is illiquid since they can’t be traded, cashed out or transferred until converted into free trading shares and registered with the Depository Trust & Clearing Corporation (DTCC).

Share Classifications

It’s important to understand the distinctions between the three types of share classifications: authorized shares, outstanding shares and the stock float.

Authorized shares are the maximum number of shares that the company can issue as documented in the articles of incorporation.

Outstanding shares are the total number of shares that have been issued including free trading and restricted stock. The number of outstanding shares is very important when determining valuation (i.e. market capitalization) and performance metrics (i.e. earnings per share). The value of a company, market capitalization, is measured by multiplying the stock price by the total outstanding shares. When companies release earnings reports, they report using earnings-per-share (EPS) metric, which is also based on the outstanding shares with some modifications (i.e. diluted earnings per share, adjust earnings per share).

What Is A Stock’s Float?

The share float, also referred to as floating shares or stock’s float, is the actual number of shares that are available to trade. This is calculated by subtracting the restricted shares, treasury shares and closely held shares by insiders and beneficial owners from the outstanding share count.

Stocks Float Calculation

Why A Stock’s Float Matters

A stock’s float has a material and noticeable impact on share price action. The float represents the true supply of shares available for trading. If demand is high but supply is low, then share prices rise as buyers bid up prices as sellers raise their offers. Thin float stock prices can move dramatically on small volume activity.

Stocks Float Impact On Share Price

The determination of a “low float” is relative to the price of the stock. Depending on the share price, thin floats can be stocks with less than 20 million shares. However, even a 100 million share float can be considered “low” depending on the stock price. As a rule of thumb, the higher the price of a stock, the thinner the liquidity becomes.

A thick float has much more liquidity resulting in tighter spreads and less slippage. It takes much more volume to move prices on thick float stocks. Beginners should start with thick float stocks before attempting to trade thin floats.

Thick Stocks Float More Liquidity

Characteristics Of Low Float Stocks

A low float, also referred to as a thin float, tends to have less liquidity which results in wider bid and ask spreads. Due to the smaller supply of stock, any surge in demand can trigger rapid price moves. This is why low float stocks tend to have higher volatility.

Thin Stocks Float Less Liquidity

For beginners, this can result in a lot of slippage buying and selling shares. As a rule of thumb, don’t use market orders on low float stocks. Instead, use limit orders to cap the slippage. Experienced traders using a direct market access (DMA) broker should consider direct access routing accompanied by hidden and/or reserve orders to split the spreads for fills and potentially earn liquidity rebates.

The Impact Of Float On Short Sellers

It can be more difficult to find shares to short in low float stocks, and these stocks are often found on hard-to-borrow lists. HTB stocks usually require a short locate request, which can incur a fee. They tend to have a higher borrowing rates and require higher maintenance margins.

While price swings can be extreme and profitable if on the right side of the move, low float stocks are highly susceptibility to short squeezes. Short sellers often get “trapped” when there are no more borrowable shares with the only option being to cover the shorts before intraday margin calls get activated triggering forced liquidation (brokerage platform automatically covers the shorts by buying shares with market orders). Short covering requires buying back shares in the open market, which raises demand and drives prices higher forcing frantic short sellers to chase shares even higher.  A total loss of the capital in your account is quite possible if you are concentrated on the short side in a stock that is experiencing a short squeeze.

Stocks Float And Short Squeezes

The information contained herein is intended as informational only and should not be considered as a recommendation of any sort. Every trader has a different risk tolerance and you should consider your own tolerance and financial situation before engaging in day trading. Day trading can result in a total loss of capital. Short selling and margin trading can significantly increase your risk and even result in debt owed to your broker. Please review our day trading risk disclosuremargin disclosure, and trading fees for more information on the risks and fees associated with trading.

Related Content

What is a Day Trading Strategy?

What is a Day Trading Strategy?

“The more things change, the more they stay the same”, is a classic theme that applies not only to the markets but also the day traders that populate them. While it’s easy to click buy and sell orders all day chasing stocks, the key to longevity is having a well...

Everything You Need to Know About Large Trader IDs

Everything You Need to Know About Large Trader IDs

Volatility in the markets can originate from all sorts of participants ranging from small retail investors to major institutions and hedge funds. The “meme” stock revolution has empowered the retail trader as groups of independent retail traders all jumping into...

How to Deal with Trading Losses

How to Deal with Trading Losses

Every trader knows that losses are part of the game. However, there are good losses and bad losses. It’s easy to have a case of Schadenfreude whenever taking a stop loss. If the stock collapses much lower after you stop out, you feel better. If the stock immediately...

The Ultimate Guide to SEC Filings

The Ultimate Guide to SEC Filings

The U.S. stock markets are regulated by the U.S. Securities and Exchange Commission (SEC). This independent federal governing body is responsible for ensuring the integrity and structure of financial markets, protecting investors and facilitating capital formation....

The Ultimate Guide to Scalp Trading

The Ultimate Guide to Scalp Trading

The thrill of stepping into a trade that immediately spikes after your entry enabling you to sell into the momentum for a “scalp” on moderate to heavy sizing can be addictive. Even better, when you “high-tick” your exit, meaning selling your position right into the...

The Ultimate Guide to Momentum Trading

The Ultimate Guide to Momentum Trading

Momentum trading is a popular trading style in which traders aim to take advantage of short-term price momentum. While trading momentum stocks can be lucrative, it’s a double edged sword that can cut hard and fast without the right preparation and trade management. ...