Stocks Markets

What is Floating Stock in the Share Market?

Save & Invest

Welcome to this roller coaster world of money, loss, profit, shares, and stocks!

In general, one can either make or break themselves in the stock market. It is such a volatile space that all assets can be gone in a blink of an eye. On the flip side, one can even become a millionaire. 

With that said, the intention is to make good profits in the stock market. After all, who wants to bear losses? 

But investors need to stop themselves from making a mistake. That is jumping on the bandwagon with little or no knowledge.

If someone is into randomly buying and selling stocks, bearing losses is inevitable. This is where a deep understanding of the stock market is necessary to minimize losses and maximize returns.

One must be familiar with the structure and operations of the stock market. 

One such term that one needs to understand is “floating stocks.” Don’t worry, the concept is not that difficult. Let’s understand it in more detail. 

What is floating stock? 

The number of shares available for trading on stock exchanges is referred to as “floating stock.” The shares that are represented by floating stock are referred to as the “floats” of a company.

Generally, a company with fewer floating shares experiences lower demand from sellers. As a result, it could be challenging to locate buyers and sellers for such businesses.

A stock with a low floating percentage is a penny stock. It is far more volatile than a stock with a high floating percentage. However, one needs to understand that floating stock does not stay the same over time.

The corporation may issue more shares to raise money, which would increase the floating stock. If the company buys back the shares on the open market, the floating stock price will again decrease.

Understanding floating stock 

The total number of shares issued by any company in an IPO enters the secondary market once it goes public. As a result, investors get free access to the shares here. This includes a diverse range of organizations, including big financial institutions, and non-retail and retail investors.

The amount of shares purchased by these groups reduces the number of outstanding shares of a company. Floating stock, which is now accessible in the market for new investors, is the remaining stock that is not held by the business.

For instance, the corporation ABC has 20 million shares in existence. Institutional investors may own 8 million of the 20 million shares, while employees may own 3 million, and management and connected parties may own 7 million. 10%, or 2 million, would be the only quantity that could be traded openly.

Importance of floating stock 

The free float of a company is crucial for investors. Companies with low floats typically have stocks that are more volatile and have wider spreads.

One may find it challenging to enter and exit low-floating equities. A substantial portion of the shares of low-float businesses are held by a small number of organizations. It may not be exposed to frequent buying and selling.

Due to the lack of available shares for trading, large institutional investors frequently steer clear of businesses with low-float stocks. When investors purchase many stocks, a low floating stock diminishes liquidity and influences the share price.

Limitations of floating stock 

Understanding floating stock is essential in order to safeguard one’s assets. With that said, floating stocks do have various restrictions, such as: 

Negative Investor Sentiment

If a firm has few floating shares, investors can get discouraged from investing, as they might think there aren’t many stocks available.

Even if the business is financially sound and runs well, one should probably avoid investing. It is because the stock will likely be extremely volatile or have little liquidity.  

Stock Dilution 

Even when there is no need for capital raising, some corporations issue extra shares to raise their floating stock. Such a move enlarges the company’s outstanding shares, thereby diluting the stock.

The primary factor affecting the firm’s share price is stock dilution, which may require one to sell their current holdings.

What impact does floating stock have?

Individual investors, specifically those who participate in pools like mutual funds and ETFs, are not directly impacted by the stock float. Additionally, long-term stock investors experience no direct effect on their investments.

This is due to the possibility of a major improvement in performance, which might cause the high float stock to drop. In that case, the marketer must accurately evaluate the company’s future, vision, performance, growth, and other aspects.

Also, the short-term volatility of stocks has a direct effect on investors, who often buy or sell stocks based on the volatility.

It is not wise for any short-term trader to invest heavily in floating stocks. While investing in cheap stock floats, one can end up selling the stocks at a lower price. For short-term investment, this heavily depends on the company’s future goals and success.

The key takeaway

There are only a few Indian companies with high floats. One may invest in low-floating companies but should always avoid sudden price fluctuations.

Also, one should avoid small companies with low-flow floating stock. The price is bound to be vulnerable to manipulation. All in all, investing in low-float stocks is not a great idea.

You might look for a buyer for your investment for a long time and never find one. Also, your investments might see high volatility, which increases the chances of loss. 

For more finance-related information, do not forget to visit Piramal Finance. We aim to simply finance better understanding.