What is Stock Float in share market?
Stock float is the number of shares of a company that is available to trade in the market. The formula to calculate stock float is:
Stock float of a company = Outstanding shares of a company - restricted stock of a company
Shares outstanding= Total number of shares held by all shareholders. It includes all the shares that a company has issued. The number of outstanding shares is generally mentioned in a company’s balance sheet.
The restricted stock of a company is the stock of a company that cannot be traded like promoter’s stake, institutional investors, stocks lying in lockin period, etc.
Assume company ABC ltd has 50 lakh outstanding shares out of which, 10 lakh are restricted shares. So the shares that are available for trading are the outstanding shares-restricted shares. 50 lakh – 10 lakh = 40 lakh shares are available for trading. This number is only for a particular period. The floating stock of a company can increase or decrease in the future.
The stock’s float is normally denoted as a percentage of the company’s total stock. In the above-mentioned example out of 50 lakh shares which is the company’s total stock, 40 lakh are available for trading. This means that the company’s float is 80%.
If a company has few shares available to trade in comparison to the total outstanding shares, it has a low float. Companies whose higher number of shares are readily available to trade have a higher float.
Low float stocks
A low float means that out of a company’s outstanding stock available only a very small percentage is available to trade. In the above example, out of 50 lakh outstanding shares, if 30 lakh were restricted stock, only 20 lakh shares will be available for trade that day. The company’s float is 40%. This is a low float. A low float has its advantages and disadvantages. A low float stock means that it is not easily available in the market and it might be difficult for you to sell this stock later on. A low float can also mean that majority of shares are held by few investors of the company. If the majority of the company’s shares are held by promoters, it means that the management will act in the company’s best interest and stock will command a premium in the market.
High float stocks
The company’s float can never be higher than the outstanding shares as the float is only part of the outstanding shares. A company can increase the number of outstanding shares available or sell the promoter’s stake to increase the float. As an investor, you might prefer high float stocks as they have high liquidity in the market and you will have an easier time selling them.
Stock float lets you know how much of the company’s shares are available in the market to trade in and also lets you know how easy it is to sell the stock. It also lets you know how much of the company’s shares are owned by the company’s insiders so that you can make easy investment decisions.
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