16 January 2024 | By INDIE
Understanding floating stock is key for investors evaluating companies on the public markets. As businesses issue initial public offerings, not all shares are readily available for trading. This article explores the definition of floating stock and how its percentage is calculated. It also discusses why the float is an important metric for liquidity, valuation, and ownership control.
What is floating stock?
Floating stock, also known as float, refers to the number of shares of a company that are available to be traded publicly. When a company first lists on a stock exchange through an initial public offering (IPO), only a portion of its total issued shares are made available for trading by general investors on the open market. The remaining shares are held by promoters, employees, and other early investors who are usually restricted from selling for a period of time due to lock-in clauses. It is the shares that are not locked in that make up the float portion. Understanding floating stock is important for investors to evaluate liquidity and pricing of a company's shares.
Why is float stock important for investors?
The floating stock portion is an important figure for investors to analyze when looking at potential investment opportunities in Indian stocks for a few key reasons-
Liquidity - A higher percentage float indicates greater liquidity as it means a larger pool of shares is easily available to be bought and sold without significantly impacting the share price. Less liquid stocks with very low floats can see high volatility.
Valuation - Companies with a low float may appear undervalued based purely on fundamentals alone since demand from limited shares trading can drive up the price.
Volatility - Stocks with tiny floats are at risk of experiencing volatile price swings even with low trading volumes due to the limited supply of shares in the market.
Takeover threat - Companies with poor public floats are vulnerable to potential takeovers from large shareholders or institutions who can more easily acquire controlling stakes.
Information advantage - Promoters and other major shareholders tied into low float stocks have more exclusive information that can allow them to time their trades for maximum profit.
Controlling shareholders - Indian companies frequently have dominant controlling stakeholders who can easily influence outcomes for minority shareholders with even a small float away from public ownership.
Evaluating a company's float stock percentage is an essential metric for investors to consider when assessing liquidity risk, valuation accuracy, and the level of control of key shareholders over a listed firm on Indian bourses.
Why are low-float stocks attractive?
Despite the increased risks that come with lower floats, some Indian investors also view them as potential opportunities. Here are some reasons why low float stocks can be attractive.
Price volatility - Sudden price spikes are possible in stocks with tiny floats as even small trades can create disproportionate demand, allowing early movers to capitalize.
Limited sell pressure - When promotions release locked-in shares, it could flood the market with sell orders and crash the price. But low floats mean limited selling.
Takeover potential - Acquirers spend less to buy out companies with poor floats, making them targets for investors with consolidation ambitions.
Promoter backing - Powerful promoters supporting less liquid bets can give low float stocks an perceived upside if their business strategies prove successful long term.
Empty float - Some stocks show high floats on paper as most shares are encumbered, leaving little actual liquid supply and volatility for speculators to work with on low daily turnover.
While investors need to tread carefully when considering less liquid low float stocks due to amplified risks, some are attracted to the high potential rewards possible from strategic bets on takeover candidates or turnaround stories with limited sell pressure dampening short-term share price swings.
By understanding the implications of floating stock data, Indian investors can make more informed decisions about a company's true potential, liquidity, valuation drivers and overall investment risks presented by the ownership structure. Investors seeking to diverse their portfolio should utilise user-friendly stock broking platforms like Indie, by IndusInd Bank, and set on the path of wealth creation.
