Understanding the Investment in Low Float Stock

  • Nov 19, 2019 AEDT
  • Team Kalkine
Understanding the Investment in Low Float Stock
Low Float Stocks

Low float stock is a stock that has a relatively smaller number of shares available to be actively traded in the market compared to other stocks. In equity markets, the term low float stock means the number of shares available for trading to the general public.

Corporations could have a portion of equity share capital that is restricted or not available for daily trading purposes. Generally, these include shares held by top executives of the company whose deliveries are contingent upon a specific event or maybe targets.

New floats or freshly debuted companies on public markets usually require keeping some shares locked or restricted for trading for a stipulated period of time, following the completion of that period, the restricted number of shares are made available for trading purposes.

If you subtract the restricted number of shares not available to trade from the total shares outstanding, it gives the number of shares that are available for active trading or float, depending upon the accuracy of restricted share data.

The category could also include shares held by institutional shareholders in blocks, and at times, the parties involved in taking a company public may receive some share in return that would be needed to be kept restricted.

Legally, the intention to have shares of the company restricted is to prevent any manipulation in the markets by the owners of the restricted shares.

As an example – suppose the owner of the company has sold 50 per cent stake of his company to make a public debut or IPO. Now, the company is being traded in the markets, and the owner want to sell the rest of his stake in the company.

Such large number of shares, if traded at a lower price might drag the price of the stock to the lower level, causing substantial erosion of market value or an investor’s capital that was invested at the time of IPO.

[ Also Read: All You Need To Know About Australia's IPO Market ]
Investment in Low Float Stocks

Supply Gaps

When a large number of shares are not available for trading, it makes them a low-float stock; this also means that there is a relatively lesser supply of that low float stock in the market for active trading.

News Catalyst

In cases when the stock of a company, having a low float, has made significant development that is favourable for investors; it might cause the rise in demand for the stock with already lesser supply, probably causing movements in the stock price.

Volatility

This leads to a volatile characteristic of the low float stocks. As there could be adverse development in the companies with the low float. Hence, the low-float stocks are much like penny stocks with higher volatility.

Therefore, the market for investment in low float stocks could be highly volatile, and investors should consider their risk appetite.

Value Gaps

Low float stocks usually include smaller companies that are aiming to become larger in size, and an investor could crack these value gaps through highly sophisticated research and investing approach.

By highly sophisticated research, we mean the fundamental and technical analysis of the low float stock. It would allow the investors to get acquainted about the risk and rewards in investing in a particular low float stock.

Volume

Investors should look for the volume traded in these stocks, as there could be cases when a seller is unable to find any buyer. Analysing the volume traded of the low-float stocks would allow the investor to know about the liquidity status of the stocks before making any decisions.

Upcoming Floats

Upcoming floats include the companies vying to make a public debut or initial public offering (IPO). In equity markets, the initial public offering allows an investor to build up stakes in the company at the earliest in public market terms.

Some of the upcoming floats on ASX:

Amaero International Ltd (Proposed Code 3DA)

Amaero International has applied for the initial public offering of between 30 million and 40 million fully paid ordinary shares in the company at an issue price of $0.20 per share to raise between $6 million to $8 million. According to ASX, the company has a proposed date of listing on 25 November 2019

The firm is engaged in the additive manufacturing market with specialisation in the aerospace sector. A wholly-owned subsidiary of the company was formed in 2003 to commercialise the technology developed at the Monash University’s Centre for Additive Manufacturing.

According to the prospectus, in the year ended 30 June 2019, the company reported revenue of $179.82k and incurred a loss of $853.23k. General and administrative expenses for the year were $901.73k.

Aerometrex Limited (Proposed Code AMX)

Aerometrex Limited has a fully-underwritten offer of 25 million new shares at an issue price of $1.00 per new share to raise up to $25 million. According to ASX, the company has a proposed date of listing on 10 December 2019.

Aerometrex is an aerial mapping and spatial technology businesses in Australia, building an enviable reputation in industry and government for its services including, aerial mapping and photography, LiDAR and aerial surveying.

The company is primarily engaged in the aerial surveying industry with an important contribution in the development of cities, societies, natural resources management and environment. According to the prospectus, in the period ended 30 June 2019, the company posted revenue of ~$11.6 million and delivered a comprehensive profit for the year of $2.57 million.


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