Float refers to the number of company’s shares that are open for trading on the stock exchange. That is to say, the quantity of the stock that is publicly available for investors to trade in.
How to derive float?
Yes, you must be wondering how to identify the company’s float. It is based on the simple calculation in which closely-held shares plus restricted stock of the company are deducted from the company’s total number of shares outstanding.
In simple words, we can say float excludes all the shares that are held by the company’s management, owners, employees or are otherwise restricted to be traded under the lock-in period. On technical fronts, closely-held shares comprise of the number of shares held by the company’s director, management, owners as a part of their compensation package or under Share purchase Plan among others. It also includes shares held by the employees of the company generally under the Employee Stock Option Plan (ESOP). Whereas coming to the restricted stock of the company, we can say any number of shares that are restricted to be traded publicly or have limitation for sales like in the case of escrow are referred as restricted securities.
To get rid of all the confusion, let's take a practical example! Suppose, a company’s total outstanding shares are 50,000, but 5,000 shares are held by management, 2000 shares have been distributed as ESOPs, and 15,000 shares are under escrow account.
Then, in such a case, the company’s float would come to 28,000, [50,000-(5,000+2,000+15,000)] i.e., [Total Outstanding stock- (Closely-held shares + restricted stock)].
Should you bother about the company’s float volume?
Of course! Every investor needs to know the company’s float volume as it has a direct impact on the volatility of the stock’s price. In general, the size of a company’s float and the volatility in its stock price have an inverse relationship. That means if the small number of company’s share is free to be traded on the stock exchange, there will be higher price volatility but to the contrary, if the company has a large number of shares available for trade, there will be a little impact on the change in stock price. It’s a simple weighted average method, reflecting the control of each share on its price movement.
Further, with any change in insiders trading, there will be a direct effect on the company’s float. But the on-market trade which includes buying, selling and shorting does not cast any change in the float as these reflect the mere trading actions representing the redistribution or change of shares ownership.
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