What is Floating Stock?
Floating stock is defined as the total number of stocks that are available for trading in an open market. It represents the total number of outstanding stock that are offered for public investment. The number of floating stocks can be identified by subtracting the company’s closely-held shares and restricted shares from the company’s total shares. The number of floating stocks indicates the total available shares that are traded openly by the public.
Floating Stock Formula
Floating Stock = Outstanding Shares – [Shares Owned by Institutions + Restricted Shares (Management and Insiders Shares) + ESOPs]
Outstanding shares are those shares that a company issues and sells to investors. Closely-held shares are the shares that are owned by major shareholders, insiders and employees. It can’t be traded to the public like common stocks. Restricted stock is the non-transferable stock of a company.
ESOP -Employee stock ownership plan.
Suppose company ASD has 50,000 outstanding shares. The company ASD owns 15,000 shares. 12,000 shares are owned by large institutional investors. The management and insiders own 10,000 shares. 5,000 stocks are unavailable as these are part of ASD’s Employee Stock Ownership Plan (ESOP). The available 8,000 stocks are floating stocks.
Advantages of floating stocks
- Floating stocks help investors in understanding the total shares available for trading in the open market.
- Higher the percentage of floating stock, the higher the number of investors who are willing to invest in the company. A large number of floating shares attracts more investors due to the availability of the shares in the market and its ease to borrow and short sell in the market.
- Floating stock gives a clear picture of the number of shares which are owned by the public. Based on this number the company can make decisions on whether to increase or decrease the number of shares outstanding.
- It indicates the goodwill of the company.
- It helps to identify the volatility and liquidity of the stock. Any news that is related to the industry or the sector, in particular, can impact the volatility and liquidity of stocks. Stocks with low floats give a good opportunity for investors to exit or sell the stock after finalizing a good trade.
Disadvantages of floating stocks
- Investors may refrain to invest in a company which has a small floating stock due to the scarcity of the stocks in the market.
- Floating stock can prevent any investors only because of the number of shares in the market available for trading without recognizing the actual potential of the company.
- A company may issue additional shares just to increase the floating stock even when the business does not require additional funds. It would result in Stock Dilution.