There are some things that get investors excited, one of them is when a company floats on the markets. This initial public offering (IPO) is the number of shares that a company is issuing for sale at an anticipated price. 

The size of the float is important because the less supply of a stock, the higher the price often tends to be. 

Of course, once a firm releases its stock to the public market, then it becomes something of a free-for-all – they have no power to change the price of their shares once they are available to everyone. 

Indeed, the only autonomy that a company has over its float is in deciding how many shares are issued – they can change this amount even after the initial release.

The question on your, and everybody else’s, mind reading this is whether or not an IPO is a good time to invest in a company.

Company float – how is it calculated?

It goes without saying that a company’s stock issue is not decided by plucking a number out of the air at random. 

Instead, the figure is calculated by taking a company’s outstanding shares – this is the grand total of all the stocks that are available – and subtracting the restricted stock from the number.

Restricted stock is that which is unavailable to be traded for one reason or another. This can be held by company ‘insiders’, such as investors or as part of an employee share scheme, or it can be restricted due to the terms of a sale or as part of a lock-up period that goes with the issuing of an IPO.

And so, the float is an exact approximation of how many shares there are to be bought and sold in a particular company.

You can trade IPO stock of brands all over the world, from tech start-ups to major conglomerates, with an appropriate broker, and so it’s worth making the Oanda minimum deposit to get a feel for what is available if you are new to investing and trading.

The float compared with authorized & outstanding shares

There is an important distinction to be made between the float compared to the difference with authorized and outstanding shares.

As we know, the float is the number of stocks that the public can trade when the restricted shares are taken into consideration.

The authorized stock, however, is the total amount of shares that a company can offer (basically the float and restricted stock combined). The number is usually detailed when the business is formed, however, this is the maximum amount – the company can choose to issue less if they prefer.

That leads us nicely onto outstanding shares, which is the total sum of all shares that have actually been issued – publicly owned and restricted. To offer insight with a real-world example, Amazon has issued 506 million outstanding shares…. but around 73% of those are owned by ‘insiders’ and private institutions.

So, as you can probably imagine, these can be three wildly different numbers depending on how the company goes about their float and issuance of shares. 

The relationship between float size and stock price

So why is the company float so important for investors and traders?

Let’s think about the role of scarcity and supply. If I have a piece of art to sell that is a one-of-a-kind by a world-renowned artist, the chances are that I can charge a high price.

Conversely, if the art that I own is simply a reprint, of which tens of thousands are available, then clearly my asking price will be a lot lower.

The point is that when there is an abundance of something, but demand remains at a flat line, then the price will fall as a result – that is page one of the business textbook.

And so, we can utilize the law of supply and demand in the context of a company float. The number of shares available to the public will, in some ways, dictate their price – if an over-abundance is issued, then traders will have more opportunity to pick some up at a low price. Of course, the opposite is true for a small float from a desirable company.

It’s not an exact science, and there are other factors that go into share price regardless of the float – the company’s financial performance being a blindingly obvious example, as well as market sentiment and large-scale pump and dump campaigns.

But clearly, a scarcity or a large issuance will be key factors that determine share price after a float and indicate how desirable a stock might be to buy.

Understanding float & stock volatility

Given what we have learned so far, you might already be getting your tanks on the lawn in readiness for investing in a low float stock.

However, we have to point out that just because there is a scarcity of a particular share – which should, in theory, push up its price, there are other conditions that have to be considered.

A low float can actually be considered an obstacle for traders who wish to be active in the market. Where we have a small number of shares, we can expect lower liquidity and thus wider spreads between the buy and sell price – as such, it can be difficult to enter the market at an appropriate point, and even more challenging to exit with profit intact. 

Floats with lower stock quantities are also likely to be subject to more extreme bouts of volatility, with smaller investments able to move the needle more.

Big capital investors and professional traders tend to leave low float stocks alone, purely for the reasons outlined here, and instead concentrate on those where they can time their market entry and exit more precisely due to their being a greater number of shares available. 

As ever, you can make your own choices about which trading path you wish to pursue, but hopefully the caveats to investing in low float stocks have been made loud and clear.