What exactly does it mean when people refer to a companys float, and why might the size of a companys float have a direct impact on how the stock trades?
First off, what exactly is a float?
To understand what a float is, we first need to explain what shares outstanding mean. Shares outstanding are the total number of shares that a publicly traded company has. These include shares owned by insiders and large institutions, plus restricted shares and the float.
The float represents the shares of the company that are freely tradable. Meaning, the shares other than those held by institutions or other owners totalling more than 5% of the company, restricted shares and insider holdings.
Lets take a look at a real world example. Simtek Corp. (SMTK) currently has 16.51 million shares outstanding. If you multiply the number of shares outstanding by the current share price ($2.81), you are left with a total market cap of $46.40 million dollars.
Now, Simtek has 10.31 million shares in its float. This means that after backing out shares held by owners that total more than 5% of all shares, restricted shares and insider holdings, we are left with 10.31 million shares. This is the float.
Now why is the float important?
The smaller a float, the more volatile a stock can become. If a stock has one million shares in its float and announces really good news, the share price will soar due to their being hardly any shares in the float. If there are hardly any shares in the float, this means that shares are harder to buy and the price to buy shares will go up.
If a stock has a really big float, this would mean that the stock is prone to less explosive moves. A stock with a float of 100 million shares wont rise 100% in one day, but a stock with a float of 1 million shares could.