By Arjun Chandrasekar.
Overview
Someone new to investing might think that “floating stocks” as a stock that rises or “floats” up, but that’s not the case. Floating stocks are essentially the amount of shares a company has available for investors to hold and trade in the market. Many investors utilize this data to measure a stock’s valuation.
Formula
The formula to calculate “floating stocks” is quite simple: just take the amount of outstanding shares of the company and subtract it by its restricted stock. One important thing to note about this value is that it’s prone to change due to a number of reasons including but not limited to legal issues, buying and selling of stock by major shareholders, and shares that are bought back by the company itself. One example of a use of this formula is the S&P 500, which uses this on its popular stock indexes to find each company’s market capitalization.
Low vs High Float Stocks
Typically in smaller companies, the executives such as directors or managers will have a large stake in the stock, leaving only a small percentage of shares available for the public to trade. Because of this low number of shares ready for investors to buy or sell, the stock is much more volatile. This is good for some investors, especially day traders, because this excessive movement in the stock’s value can quickly produce a large amount of money. However, the opposite is true for high float stocks, where you can find them in generally larger companies. Because these companies have such a huge market capitalization, the amount of stake their executives hold in the stock is not excessive. These companies also have the ability to purchase more shares, which allows the public to trade their stock more, which keeps the stock less volatile.
Conclusion
So now that we’ve gone over an overview of floating stocks, the formula to calculate the actual value, and the difference between low and high float stocks, let’s finish up with a quick recap. Day traders and active investors find more opportunities in low float stocks simply because of their high volatility and price swings. Day traders will research these stocks using technical analysis such as moving averages, profit targets, support and resistance, and setting stop losses, which aids in minimizing risk. High float stocks are generally safer investments as they aren’t as volatile, meaning their price doesn’t change dramatically. In short, they are great investments for those who are just getting started.
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