Corporations must make a number of shares available to the general public for trading in the open market in order for the company’s stock to be listed on the major stock exchanges, such as NASDAQ and the New York Stock Exchange. The shares available for trading are known as floating stock.
However, a publicly traded company also has issued shares and outstanding shares. Here are the differences between them and floating stock.
What Are Issued Shares?
When a company is first formed, its incorporation documents authorize the issuance of a certain number of shares of stock. After the ownership of the shares is transferred to company employees, managers and outside shareholders, they become outstanding shares. From time to time, the company's board of directors can authorize to increase the number of issued shares.
What Are Outstanding Shares?
Outstanding shares are the company’s total issued shares less the number of shares in the treasury, explains the New York Attorney General. The company creates treasury shares when it buys back a portion of its outstanding shares but does not retire them. The total number of shares outstanding can never exceed the number of issued shares.
For example, if a corporation has 5 million issued shares and has purchased back 400,000 shares for its treasury, the company’s outstanding shares would be 4.6 million shares (5,000,000 minus 400,000).
Managers and financial analysts use a company's number of outstanding shares to calculate its earnings per share (EPS). These metrics are useful to gauge the company’s performance over time.
What Is Floating Stock?
Floating stock is the quantity of shares that a company makes available to the public for trading on stock exchanges. You can calculate the number of floating shares by subtracting the number of closely held and restricted shares from the company's total outstanding shares.
Closely held shares are owned by large shareholders in the company, employees and other company insiders, such as accountants and lawyers. Restricted stocks are shares that cannot be traded because of a temporary restriction, such as the lock-up period after an initial public offering (IPO). The number of floating shares can never be higher than the number of the company’s shares outstanding.
The quantity of floating shares can occasionally change as a result of:
- Secondary offerings of new shares of stock.
- Share buybacks for the treasury.
- Buying and selling of shares by insiders and major shareholders.
- Stock splits that increase the number of shares outstanding or reverse stock splits that reduce the number of outstanding shares.
What Is Low Float vs. High Float?
Stocks with a public float of fewer than 20 million shares are considered low-float stocks. For comparison, Barron's shows that the large company Amazon has a float of 9.2 billion shares and 10.2 billion shares outstanding.
Prices for low-float stock are generally lower compared to other stock prices, and they are usually more volatile and have lower daily trading volume, which reduces the liquidity of the stock and increases the bid-ask spread.
Stock market traders like stocks with low floats because the volatility of their share price creates more opportunities to profit from the price fluctuations. However, institutional investors can sometimes find that the low liquidity makes it difficult for them to enter and exit large positions.
What Is a Good Float Percentage?
Whether a stock's float percentage is good or bad depends on the type of investor.
Conservative investors will like stocks with high floats because they are typically larger companies with a long history of profitable performance and stable prices with steady growth. The downside is that the stock price has lower volatility and less opportunity for high short-term gains.
Less well-known companies usually have low floats and are more likely to have dramatic price fluctuations as a result of some type of news catalyst. Investing in these types of companies is considered riskier.
James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues. James has been writing business and finance related topics for work.chron, bizfluent.com, smallbusiness.chron.com and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.