Introduction to Floating Stock
The number of shares which are available to the general investors apart from the institution holdings, management holdings, and shares held under the employee stock ownership plan. The number of floating shares is not fixed and depends on the stock’s overall buying and selling in the open market. The large institutions, management used to hold the shares of the company while the general investors or the traders do not have access to trade on these stocks.
Examples of Floating Stock
Examples of Floating Stock are given below:
In April 2019, ABC Ltd had 6.5 billion shares outstanding. Out of this, 15% were held by insiders or by the management personnel. Large institutions held 58.64% with large fund exposure. Calculate the total number of floating shares available to the small investors or to the traders.
- Total number of shares held by the company = 6.5 billion
- Percentage of shares held by the management personnel and large institutions = (15+58.64) % = 73.64%.
- Thus, the total number of shares held by the management and large institutions = 6.5 billion *73.64% = 4.7866 billion.
- A number of shares held as floating shares = (6.5 – 4.7866) billion = 1.7134 billion.
In September 2019, XYZ Ltd reported 100 million shares outstanding. Out of this, 75% were held by insiders or by the board of Directors. Large institutions held 20% with large fund exposure. Calculate the total number of floating shares available to the small investors or to the traders.
- Total number of shares held by the company = 100 million
- Percentage of shares held by the management personnel and large institutions = (75+20) % = 95%.
- Thus, the total number of shares held by the management and large institutions = 100 million *95% = 95 million.
- A number of shares held as floating shares = (100 – 95) million = 5 million.
Advantages of Floating Stock
Some of the advantages are given below:
- Floating stocks allow general investors to enter the market and take a position in the respective stock. An investor is allowed to buy stocks of the number of shares as per their capacity.
- The overall liquidity of the stock depends upon the number of floating stocks available in the market. The higher the number of floating stocks indicates the lesser volatility of the stock and vice versa. If the number of floating shares diminishes, it is likely to create higher volatility in the stock price.
- A small-cap company with low floating stock will not provide much room for bigger investors, while it would provide higher options for small investors. Thus, in a way, a lower number of floating stocks results in lower investors’ interest and helps to retain the stock price at an optimum level.
- In the case of a large market capitalization company with large numbers of shares outstanding and a lesser number of institutional and management holding, the stock will remain less volatile. The reason is, individual investors cannot manipulate the stock price as the floating shares are available in huge numbers. Moreover, many small investors can enter and exit, which will hardly manipulate the stock piece.
Limitations of Floating Stocks
Some of the limitations are given below:
- A lower number of floating stocks may lead to lower investor’s interest which may further lead to lower pricing of the stock.
- In case of lower availability of floating shares, the price of the stock does not remain stable. When a large institution with a higher stake sells its position, the stock price tumbles because of the lower investor’s interest in the stock.
- The selling of stock by a large investor or by the company’s management may lead to lower investor sentiment, which may further result in lower stock prices.
- When the number of floating stocks is low, then an individual investor with a large amount of capital can bump up the price as the investor would be the sole manipulator of the stock price. Thus, the rising stock price of fundamentally good companies is not good news for small investors.
Important Points to be Remembered
Some of the important points are:
- The number of shares left after being held by major investors and management personnel. These numbers of shares are not restricted to buying and selling.
- The floating stocks are referred to as the number of shares available to the shareholders on a normal trading day.
- The number of floating stocks is not fixed. Instead, the number of floating stocks depends upon the large investors and management personnel’s buying and selling of positions.
- Issuance of new shares also adds to the number of outstanding shares and as well to the number of floating shares. Thus, a higher number of floating shares helps to maintain price stability.
- Again, a lower amount of floating stocks leads to the stock’s price volatility, resulting in fluctuations in the prices. If the available number of shares held only for trading is limited on a percentage term, then a trader with a higher capacity can manipulate the stock piece to a large extent and vice-versa.
- A low number of floating stocks denote heavy positions accumulated by management personnel and elite investors, which indicates that the company has a good business prospect. Most of the investors have accumulated the stocks. They have the least interest in selling their respective positions.
The availability of the number of floating stocks depends upon the financial muscle of the business. If a business has a larger equity base and there is a lower number of institutions and management holding, then there will be a higher number of floating stocks and vice-versa. The higher availability of shares with a low number of traders or a higher number of small traders will ensure the stock’s price stability.
While on the other hand, in the case of fundamentally good companies, the maximum number of shares is held by the management personnel and by the premium shareholder allowing a low number of shares available for trading for the small investors or small traders. Thus, the availability of a small number of shares ensures lower volatility of the stock price.
This is a guide to Floating Stock. Here we discuss the definition and examples of floating stock along with advantages and limitations. You may also look at the following articles to learn more –
- Examples of Long Term Liabilities
- Stocks vs Real Estate
- Derivatives Investing
- Types of Shareholders Agreement