Float Definition: Day Trading Terminology
Every stock has a float, which is the number of outstanding shares available to trade in a stock minus the restricted shares or shares held by insiders and employees. More simply, it is the number of shares that are free to trade in the open market.
Restricted shares are shares that are held by insiders that cannot be traded yet due to a lock-up from an Initial Public Offering (IPO). When a company releases its IPO, it releases a fixed number of shares onto the open market.
Let’s say a company does a 10 million share IPO at a price of $10 per share. It would raise $100 million in the IPO. This money can be used for capital investments, infrastructure, building factories, strategic investments, etc. In exchange for becoming publicly traded, the company now has an obligation to shareholders to provide quarterly and annual earnings statements.
Video on Float Definition
Whenever traders are buying and selling shares of a stock, they are trading from the same pool of shares. This outstanding float does not change when traders buy or sell stock, but there are three instances where it can change:
- Share Buyback Programs: when the company decides to buy back some of the shares they have released onto the open market (floats decrease).
- Secondary Offerings: when the company decides to sell more shares onto the open market to raise money (floats increase). This is common among small cap stocks and dilutes the value of the stock.
- Stock Splits can result in either an increase or a decrease in float (traditional splits will increase it while reverse splits will decrease it).
This is important to pay attention to because when a float is increased, there are more shares available to trade and will then require more buying and selling to move the price. Some day traders focus on finding stocks with low floats since this means that the stocks are more likely to make big moves (due to less liquidity). This can, however, create a wider spread, which might make it harder to get in and out with size at specific prices.
Higher floats tend to be more liquid and have tighter spreads. So they can be traded more easily with bigger size but will get a smaller move. An example of a stock with a high float would be Bank of America (BAC) who has a 10.51 billion share float while someone like bluebird bio (BLUE) has a float of only 39.9 million shares.