- 1 What Does Low Float Mean in Stocks?
- 2 Floats vs Shares Outstanding
- 3 Why is Low Floating Stock Important to Consider?
- 4 How to Find Low Float Stocks?
- 5 How to Trade Low Float Stocks?
Is your trading strategy just not doing enough for you? Is it taking too long for you to reach your profit goals? Have you been trying to find the best strategy to grow your portfolio quickly? The answer to all these questions might be low float stocks.
If you can properly leverage the benefits of low float stocks, they can be the fastest way for you to generate wealth in the stock market. Read on to find how to find low float stocks and exploit them for great profits.
What Does Low Float Mean in Stocks?
A stocks float is the number of shares available for the public to trade freely. When the number of shares available as float falls below 20 million, it is called a low float stock.
A stocks float is determined by the number of shares available on the market, excluding the shares kept by the company itself, its directors, executives, or other institutions. The float also excludes any shares in the lock-up period right after an IPO.
So, what is low float stock? When a company has low float stocks, it means that there is a scarcity of shares in the market compared to the total number of shares that the company has. This is because many companies issue closely-held stock owned by stakeholders and other insiders of a company, and the rest is available for public trading.
Floats vs Shares Outstanding
A stock’s float and shares outstanding are two different ways to measure its number of shares. You get the floating amount if you subtract the closely-held stock from the total share outstanding.
Float=Total outstanding shares – closely-held or restricted shares
Company A has 100 million shares outstanding, and large institutional investors own 50 million, and another company, Company X, owns 20 million shares.
The upper management and other insiders own 10 million shares. An additional 4 million shares are restricted as part of Company A’s Employee Stock Option Plan (ESOP).
So closely-held or restricted shares are 50+20+10+4 = 84 million
Float = (100 – 84) = 16 million
This means 16 Million shares are floating, which is 16%.
Why is Low Floating Stock Important to Consider?
A company’s float is a good indicator for investors as this informs them of the number of shares available for the general public to share. However, a low float is an obstacle to active trading, making it difficult for investors to enter and exit positions.
Institutions will usually avoid trading in companies with low float because they have limited liquidity and have a wider spread. Therefore, many big investors and institutions prefer to invest in companies with a larger float.
But the fact that there are limited shares available makes low floating stocks a lucrative trading opportunity. Low shares equate to high volatility, which means there is a potential for great profit and significant loss.
How to Find Low Float Stocks?
By Using a stock screening platform or taking the advice of your broker, you can find Low float stock. You can filter using specific dollar prices, float, float percentages, trade volume, outstanding shares, or others you find essential. You can also find a low float stocks screener online.
There are multiple resources and forums on the internet which can give you an idea of what parameters will go best with your trading strategy. You can also save these search parameters and make them easy to access later.
Webull is a good low float stocks screener and trading platform to find low float stock lists and trading low float stocks. However, they do not currently allow low float OTC stocks. So if you want to invest in low float penny stocks, you might want to find an alternative.
How to Trade Low Float Stocks?
The best way to trade low float stocks is to research and get to know the stock you are about to invest in. You should consider many things before making a trade, but it’s especially important when it comes to low float stocks.
Below are a few important things to look out for when looking into a low float stock:
High Relative Volume
The relative stock volume shows its current volume compared to its previous volumes. Investors need to know this to avoid getting stuck with a losing stock due to low liquidity.
They may find themselves unable to exploit changes in the price. If the price changes but trading volume don’t as much, the stock is probably not a good choice. Therefore, you should always gravitate towards low float, high volume stocks.
News about a company with low float stock can significantly impact its price. Day traders usually watch market news to get an early idea of which stocks could move.
Due to low supply, any news regarding the low float stock could cause the price to shift anywhere from 50% to 200% in a single day.
The float is a portion of the total shares available for trading. Although each trader has preferred percentages, most of them look between 10%-25%
Should You Trade Low Float Stocks?
To find out if you should trade low float stocks or not, you must first ask yourself if your trade strategy is based on short-term or long-term gains. Low float stocks are highly volatile, making them highly popular among day traders because they can make quick profits. They can buy or short the stocks depending on how the price is moving.
Sometimes traders buy low float shares and sell them for a small profit within a minute. They can do this multiple times throughout the day and generate profits of a few percent.
Penny stocks, which sell at less than $5 a share, are the most popular form of stock for low float investing. However, these stocks are mostly found on the over-the-counter market, making it a riskier investment as there is no centralized oversight.
There are multiple pitfalls to trading low float stocks, chief among them is liquidity. Due to its limited supply, a trader may have trouble buying the shares when they think it’s beneficial and selling them when they want to make a profit.
Traders often look for low float shares with high volume to tackle this issue. This is because if there are many daily trades, traders can avoid being stuck with stocks.
There is also the fact that a news catalyst can increase the volatility of the low float stock. This can cause traders to jump on the bandwagon and buy or short the stock. This is why most traders close their position at day end, as leaving it overnight can run the risk of a rapid and large loss.
Therefore, if you’re looking for long-term gains, it is not the best idea to trade low float stocks.
Phần kết luận
Low float stocks are a great option for savvy traders looking for a quick profit with relatively low investment. The high volatility and ease of access to these stocks mean that even retail investors can join in on the action and make a tidy profit.
But the potential for great profit brings with it the potential for great losses. For your investment to be successful, you must work hard hours and find out as much as you can about the stock before making trading decisions. Technical analysis and fundamental analysis of the stocks combined with a keen eye on news happening can help you be aware of a good deal waiting for you.
You must always remember only to invest what you can afford to lose and have good stop-loss discipline. Soon enough, if you hang in there, you’ll be in the big leagues.
Câu hỏi thường gặp
Here are a few answers to the question that might come to your mind.
How Do You Find the Float of a Stock?
Float=Total outstanding shares – closely-held/ restricted shares For example: Company A has 100 million shares outstanding, and large institutional investors own 50 million, and another company, Company X, owns 20 million shares. The upper management and other insiders own 10 million shares. An additional 4 million shares are restricted as part of Company A's Employee Stock Option Plan (ESOP). So closely-held or restricted shares are 50+20+10+4 = 84 million Float = (100 – 84) = 16 million This means 16 Million shares are floating, which is 16%.
Is a Low Float Stock Good?
Low Float stock is a good bet for advanced traders who can handle price volatility.
How Do You Trade Low Float?
Invest in a stock screener. Plug-in the necessary filters that fit your strategy, find the stock and call your broker.
Is a High Float Stock Good?
If you're looking for a long-term investment strategy for your portfolio, high float stocks are best as the prices are much more stable.