There’s more to a stock than its price or performance. The availability of shares, or float, plays a critical role in shaping a stock’s behaviour in the market. From liquidity to volatility, understanding float can provide valuable insights to help you make more informed investment choices. And while a float may sound like something you’d enjoy on a lazy summer afternoon, it’s not quite the same thing.

In the investing world, float plays a crucial role in stock performance. Understanding the float can give you key insights into how a company’s stock behaves and what that means for your investing strategy .

Let’s dive into what a float is, why it matters, and how it can shape your approach to the stock market.

What is a float?

Put simply, the term "float" refers to the total number of shares of a company that are publicly available for trading on the stock market. These are the shares anyone can buy and sell on exchanges like the Australian Securities Exchange (ASX) or the New York Stock Exchange (NYSE) .

But not all shares issued by a company are part of the stock float. Shares held by insiders – such as company executives or major shareholders – are typically restricted and aren’t readily tradable. These restricted shares might be subject to legal, contractual, or strategic limitations that keep them out of the open market.

In short, the float represents the portion of shares circulating in the hands of everyday investors, allowing for active trading and price discovery.

Outstanding shares vs. float

Not all shares are created equal, and it’s crucial to distinguish between a company’s outstanding shares and its float.

Outstanding shares

Outstanding shares refer to all the shares a company has issued. These include:

• Shares held by insiders, such as founders and executives
• Shares owned by institutional investors, like mutual funds or super funds
• Shares available for public trading

Float

The stock float, on the other hand, is a smaller, more focused subset of outstanding shares. It represents only the shares available for public trading, excluding those held by insiders or institutions.

For example, if a company has issued 15 million shares and insiders hold 5 million as restricted shares, the float would be 10 million shares.

This distinction is vital because the float determines how much of a stock is available for everyday investors, directly affecting trading activity and market behaviour.

What is free float?

Taking things a step further, free float zooms in on the shares most actively traded in the public market.

Free float excludes shares not only held by insiders but also by large institutional investors who are unlikely to sell their holdings frequently. This metric provides an even clearer snapshot of shares truly available for trading among retail and active investors.

For example, let's say a company has 20 million outstanding shares. Insiders hold 6 million shares, and institutions hold another 4 million. The free float would be 10 million shares, representing the portion readily available for trading.

Free float is particularly relevant in index calculations. Many major indices, like the S&P 500 , use free float to weigh companies by market capitalisation , offering a more accurate reflection of the active market.

Why float matters

A company’s float is more than just a technical statistic – it has real-world implications for stock performance and trading dynamics.

1. Liquidity

Liquidity refers to how easily you can buy or sell a stock without causing a big change in its price.

• Stocks with a high float are generally more liquid, making it easier to trade without major price shifts
• Stocks with a low float can lack liquidity, meaning trades might take longer or require compromises on price

For example, if you’re looking to invest in a stock with a high float, you can usually expect smoother transactions. Meanwhile, low-float stocks might come with challenges, especially during times of high demand or market stress.

2. Volatility

Volatility measures how much a stock’s price moves up or down over time.

• Stocks with a low float often exhibit higher volatility. This is because fewer shares are available, so small shifts in demand or supply can lead to dramatic price swings
• Stocks with a high float tend to be more stable, with less dramatic price movements

For instance, if a low-float company announces unexpected revenue changes, its stock price could skyrocket – or nosedive – because the limited number of shares amplifies the impact of market reactions.

3. Market influence

The float also determines how susceptible a stock is to manipulation.

• Low-float stocks are more vulnerable to price manipulation. With fewer shares available, a small group of investors could drive significant price changes by buying or selling a large portion of the float
• High-float stocks are generally harder to manipulate because the greater volume of shares dilutes any one investor’s influence

If you’re trading or investing in smaller companies, keeping an eye on float can help you avoid being caught in the crossfire of market volatility or manipulation.

How to calculate floating stock

Calculating the amount of floating stock is straightforward:

Float= Total Outstanding Shares − Restricted Shares

Example: Float in action

Let’s bring this to life with a hypothetical example.

Imagine a (fictional) company called GreenTech that has 40 million outstanding shares. Insiders, including the founders and executives, hold 20 million restricted shares. Institutional investors hold another 10 million restricted shares.

This leaves a float of:

40 million−(20 million+10 million)=10 million shares

This means 10 million shares are freely available for public trading, giving investors an idea of the stock’s liquidity and trading potential.

But here’s what a float like that could really indicate. With such a low float, GreenTech’s stock could be highly volatile. A surge in demand due to good news – like a breakthrough product – might cause the stock price to skyrocket. Conversely, any bad news could lead to steep declines as a small float amplifies price movements.

Why understanding stock float is crucial for investors

Knowing a company’s float can help inform your investing strategy. Here’s how:

• Liquidity and strategy: High-float stocks have often been popular long-term investors who value stability, while low-float stocks might appeal to risk-accepting traders chasing short-term gains
• Risk management: Float insights help you gauge how volatile or stable a stock might be, allowing you to align investments with your risk tolerance
• Market behaviour: A stock’s float can reveal whether it’s prone to manipulation or unpredictable price swings

Thankfully, float information is widely available on financial websites and trading platforms. Including this metric in your analysis can give you a crucial edge in understanding a stock’s behaviour.

Final thoughts

A company’s float might seem like a small detail, but it holds big implications for how its stock trades. From liquidity to volatility and even market stability, the stock float is a key factor that shapes your investing experience.

Whether you’re a cautious investor building a long-term portfolio or a nimble trader looking for opportunities, understanding the float will help you make more informed decisions.

So next time you’re researching a stock, don’t overlook the float – it could be the insight that steers your investments in a particular direction.

As always, do your own research, and reach out to a licensed financial adviser if you want further support with your investing strategy.

Happy investing!