Floating stocks might seem complex to define but they are very simple like their name. Floating stocks refer to the number of outstanding shares of the company that are available for trading in the open market. Does it mean all outstanding shares of a company are available for trading in an open market? Certainly not.
In a floating stock market, the insider shares of a company are not available for trading purposes in the open market. Insider shares here mean the shares that are closely held by the company’s insider members. Floating stocks are one of the indicators of a company’s position. Thus, it helps you to understand better about the stock’s volatility and liquidity. As an outcome, it helps you to plan out better on which stocks to buy or sell of a specific company.
For instance, suppose in April 2021, XYZ ltd had 6.5 lakh shares outstanding. Out of it, 15 percent were held by the insiders. Large institutions held a fund exposure of 58.64 percent. To calculate the overall floating shares available to traders, you will first need to find out the percentage of shares held by large institutions and management personnel. This is 73.64 percent i.e., 15 % + 58.64 %. Next, you will need to know the overall number of shares held by the large institutions and management. This is 4.77 lakh i.e., 6.5 lakh X 73.64 %. Thus, the overall floating shares are 1.713 lakh i.e., (6.5-4.77) lakh.
Top benefits of floating stock
· Floating stocks permit retail investors in the stock market to select stocks to invest or take position in respective stock. They are permitted to purchase stocks as per their capacity.
· Overall stock liquidity is based on the number of floating stocks in the market. Higher number of floating stocks means lesser stock volatility and vice versa. In case the floating shares decline, it is probable that it will lead to higher volatility in stock price.
· Small cap companies having low floating costs will not offer much scope for bigger retail investors while it will offer a higher number of options to the small investors. Thus, a reduced number of floating stocks in the market leads to lower investors’ interest and helps retain stock price at optimum margin.
· In the situation of a large market capitalisation, a company having a large number of shares outstanding and lesser number of management and institutional holdings will mean that its stocks are less volatile. Reason here is, individual investors cannot exploit stock prices because floating shares are available in massive numbers. Additionally, many small investors can exit and enter, which cannot exploit the stock price.
Disadvantages of floating stock
· Lower floating stocks might result in reduced investor’s interest, which might result in lower stock pricing.
· In case of reduced availability of floating stocks, stock price may not stay stable. When a big institution with a higher stake sells its position, stock price may tumble due to lower interest of investors in stock.
· Selling of stock by big investors or company’s management might result in reduced investor sentiment, which further might lead to lower stock prices.
· When the number of floating stocks is low, investors with a huge capital can increase the price because they will be the sole manipulator of stock price. Thus, rising stock prices of fundamentally excellent companies is not great news for small investors.