Low-float Stock: Definition and How it Works

In stock trading, “float” refers to the number of shares of a company’s stock that are available for trading. Low-float stocks, as the name suggests, are those that have a relatively small number of shares available for trading. 

This can have a big impact on a stock’s price, making low-float stocks more volatile than stocks with a higher float. While low-float stocks can offer potential opportunities for profit, they also come with their own set of risks.

In this post, we will look at the basics of low-float stocks and factors that can influence them. But first, let’s understand what a floating stock means before we dive into low stock.

What is a Floating Stock?

A floating stock is the number of shares of a company that is available for trading on the open market. To calculate the float, you subtract the company’s closely held shares (those held by insiders like executives and employees) from the total number of outstanding shares. The float is important because it tells investors how much of the company is owned by the public and how much is available for trading. 

What is a Low-float Stock?

This is a type of stock that has a relatively small number of shares available for trading in the public market. A low-float stock can be more volatile than a stock with a higher float because there are fewer shares to go around. This means that even small changes in demand can have a big impact on the price of the stock. Low float stocks are often associated with smaller companies, penny stocks, or IPOs.

Characteristics of Low-float Stocks

  1. Limited Number of Outstanding Shares: The defining characteristic of low-float stocks is their scarcity in the market. With fewer shares available, these stocks can experience significant price movements with relatively small trades.
  1. Impact on Stock Price Volatility: The restricted availability of shares can lead to heightened volatility. Small buy or sell orders may cause substantial price fluctuations, making low-float stocks attractive to traders seeking rapid movements.
  1. Potential for Rapid Price Movements: Due to the limited supply of shares, low-float stocks have the potential for rapid and substantial price swings. This characteristic attracts both seasoned day traders and speculative investors.

Factors Influencing Low-float Stocks

  1. Initial Public Offerings (IPOs): The release of a company’s shares to the public through an IPO can contribute to low-float stocks. As these stocks enter the market, the available float is limited, impacting their trading dynamics.
  1. Company Buybacks: When a company repurchases its own shares, it reduces the float in the market. This reduction can result in increased volatility and a more favourable environment for short-term traders.
  1. Insider Trading: Insider transactions, where company executives buy or sell shares, can affect the float. If insiders are actively trading, it can influence the availability of shares for public trading.

Read: Stock Market Terms and Definitions for Beginners

Conclusion

While low-float stocks can present opportunities for quick profits, they can also be risky investments. Before investing in a low-float stock, it is important to research the company and understand the risks involved. Be sure to consider the company’s financials, market conditions, and any potential red flags. If you do your homework and are willing to accept the risks, investing in a low-float stock can be a good way to potentially generate returns.

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