Last Updated on January 31, 2024 by BFSLTeam BFSLTeam
Picture this. You have purchased around 500 shares of a company that appears to have good growth potential. And you hold the stocks for a few months, expecting the prices to rise. However, much to your disappointment, there is no significant rise in the company’s stock price. And just when you are debating whether you should hold the shares or exit your position, there is a medical emergency in your family that forces you to sell your holdings and extract your funds from the market.
Except, there’s one catch. You find that you are unable to sell the shares because there are no willing buyers. This is every investor’s nightmare — a classic case of low liquidity that backfires when you least expect it to.
The floating stock is a key indicator that can help you in assessing the liquidity of a stock. Read on to know more about floating stocks and how it is important is shaping your investment decision.
Also Read: Read what is bracket order in the stock market
Table of Content
What is Floating Stock?
The number of shares of a particular stock available for trading is called the floating stock. It does not include closed shares (those which are not for public trading) and restricted shares (the non-transferable stock of the company).
The more shares there are trading, the higher the float, and vice versa. It’s important for investors to understand the concept of floating stock as it allows them to understand the stock’s liquidity.
In case of low floating stock, investment is particularly risky because of its low liquidity. It means you will have a hard time selling the stock. However, high-floating stocks are easy to sell.
How to Calculate Floating Stock?
Now that you know what floating stock is, let’s look at the mathematical formula that market experts use to calculate the floating stock of a company.
| Floating Stock = Total Outstanding Shares – Restricted Shares |
Here, total outstanding shares refer to the total number of shares issued by the company. Meanwhile, restricted shares refer to shares that are not readily available for public trading. This includes shares held by promoters, institutional shareholders like venture capitalists and mutual fund houses, Employee Stock Options (ESOPs) and other company insiders like directors and management executives.
Also Read: Be Aware of Buy and Hold strategy in the Stock Market
Understanding Floating Stock: An Illustrative Example
As an investor, it is crucial to understand floating stock. Therefore, here’s an illustrative example that can help you grasp the concept.
Assume there’s a listed company called HYZ Limited. It has issued a total of 28 lakh equity shares, all of which have been subscribed by various individuals and entities. The company’s shareholding pattern currently looks like this –
- Individual Promoters – 3 lakh shares
- Venture Capital Firms – 2.5 lakh shares
- Angel Investors – 0.5 lakh shares
- Employee Stock Options – 1.2 lakh shares
- Mutual Funds – 4 lakh shares
With the details of the shareholding pattern, you can now calculate the float of the company’s stock. To do that, you only need to substitute these values in the mathematical formula mentioned above.
Total restricted shares = 11.2 lakhs (3 lakhs + 2.5 lakhs + 0.5 lakh + 1.2 lakhs + 4 lakh)
Floating Stock = 16.8 lakh shares (28 lakh shares – 11.2 lakh shares)
As you can see, the company HYZ Limited has a total float of 16.8 lakh shares, all of which are available for public trading.
Also Read: Authorized Share Capital: Definition, and Types
Low Float Stocks vs. High Float Stocks
It is important to understand what a low-float stock is if you want to be a good investor.
A low float stock is the one which is available for trade in small numbers. On the other hand, if the total number of shares available for trading is high, it would mean the asset is a high float stock. However, there’s no fixed number that determines or defines a ‘low float’ stock. That said, most market experts label stocks with less than 50 lakh publicly available shares as low-float stocks.
Investors often prefer a high float stock since it tends to be more liquid and less volatile. A high float stock is easier to be bought and sold, due to the large number of shares available for trading.
Purchasing and selling the shares of low-float stocks, on the other hand, are much harder. Moreover, they tend to be more volatile compared to high-float stocks. This is something that you need to keep in mind when investing or trading in low-float stocks in India.
The Significance of Floating Stock
One of the major reasons why traders and investors routinely calculate the float of a stock is to get a context of the potential liquidity and volatility in the counter. Simply looking at the number of outstanding shares may not give a complete picture.
For instance, a company may have 1 Crore outstanding shares, but if 80 lakh shares are restricted, the float would just be 20 lakhs. This makes floating stock an important metric you should account for when making trading and investment decisions.
Important Things to Know About Floating Stock
Let’s now take a look at a few of the crucial things you need to know about floating stock.
- The float plays a huge role in determining the liquidity and volatility of a stock.
- A high-floating stock generally witnesses a lot of institutional investor activity.
- The total float of a stock doesn’t stay constant and may change if large institutional investors or promoters liquidate their stake by selling shares in the open market.
- A company may voluntarily increase its floating stock through corporate actions like bonus share issues or stock splits.
Conclusion
To sum it up, a floating stock is the number of shares of a particular stock that are available for trade. It does not include restricted shares and closely-held shares. Now that you know the meaning of floating stock, you must also understand the importance of this metric, how to calculate it and how to utilise it in your investment strategy.
All you need to do now is ensure that before you invest your money in a company, you must ensure it has adequate floating stock to ensure sufficient liquidity. Avoid trading in low float stocks in India or in foreign markets, because exiting your position can be challenging at best and impossible at worst.
And now that you have more awareness about navigating the markets, you only need to open a demat and trading account to begin your investment journey. You can count on Bajaj Financial Securities to fulfil this requirement — with our simple 3-step account opening process that is entirely digital and gives you access to a secure trading platform, affordable subscription packages, a wealth of market research and trading tools, and so much more!
