What is Floating Stock?
Floating stock, also known as free float, refers to the number of shares of a company that are available for retail public. These shares are held by investors, excluding those owned by the company’s promoters and promoter’s group
Stocks are classified based on their float into two categories:
Low Float Stocks: A stock is considered to have a low float if less than 20% of its total shares are available for trading for the retail investors. This usually indicates that the majority of shares are controlled by the company’s promoters or institutions, leading to lower liquidity.
High Float Stocks: Conversely, high float stocks are those where more than 20% of the company’s shares are available for trading. These stocks tend to be more liquid and are less prone to sharp price movements, offering more stability in the market.
Investing in Low Float Stocks: Key Considerations
1. Increased Price Volatility
Low float stocks tend to experience higher price volatility. With fewer shares available for public trading, even small changes in buying or selling activity can lead to significant price fluctuations. This volatility can present opportunities for short-term traders seeking to capitalize on quick price movements, but it also carries greater risks.
2. Risk of Price Manipulation
Because there are fewer shares in circulation, low float stocks are more vulnerable to market manipulation. A single large investor or a small group of investors can exert substantial influence on the stock price, potentially creating artificial price movements. This can lead to speculative bubbles or “bear traps” where investors find themselves stuck in losing positions due to the sudden reversal of prices.
3. Liquidity Issues
Liquidity is another key concern when investing in low float stocks. The lower the float, the fewer shares are available for trading, making it harder for investors to buy or sell large amounts without causing significant price changes. This can lead to slippage (the difference between the expected price of a trade and the price at which it is executed) and could increase the cost of entering or exiting positions.
4- Potential for High Returns
Despite the risks, low float stocks can offer high reward potential, particularly for long-term investors. If the company’s fundamentals are strong and it shows growth over time, the stock price can appreciate significantly, especially as there are fewer shares to be diluted by new offerings. Moreover, positive news or events can lead to a surge in demand, pushing the stock price higher due to the limited supply of shares.
Investing in High Float Stocks: Key Considerations
1. Stability and Lower Volatility
High float stocks generally offer lower price volatility. Since more shares are available for trading, it takes larger amounts of buying or selling activity to impact the stock price significantly. This makes high float stocks more stable and less prone to sudden price swings, which is ideal for risk-averse investors looking for steady returns.
2. Higher Liquidity and Easier to Trade
With high float stocks, there is greater market liquidity. This means investors can more easily enter and exit positions without significantly affecting the stock price.
3. Limited Potential for Explosive Gains
While high float stocks are less volatile, they tend to have a reduced potential for large, sudden price increases. These stocks are often established companies with a solid track record and a broad base of institutional investors. As a result, high float stocks are less likely to experience significant price surges unless there is a major catalyst, such as a new product release or a corporate acquisition.
4. Suitable for Long-Term Investors
High float stocks are generally more appealing to long-term investors, including institutional players. These stocks tend to be well-established, offering steady growth with lower risk. They are typically part of the blue-chip segment and are suited for building diversified, stable portfolios.
Statistical performance of Traded Stocks classified on the basis of High Float and Low Float
The table compares the performance of low float and high float stocks based on public holding at the start of each financial year. The data reveals that high float stocks generally outperform low float stocks, with low float stocks only exceeding high float returns on three occasions over the past decade. While the average returns of both categories over the 10-year period are relatively similar, high float stocks consistently deliver better average returns, highlighting their superior stability.
As a result, high float stocks are typically more attractive to risk-averse investors, seeking consistent performance and lower volatility. In contrast, low float stocks, characterized by higher volatility, are more suitable for risk-taking investors aiming for higher potential returns despite the increased price fluctuations.
Key Insights: Choosing Between Low and High Float Stocks
When choosing between low and high float stocks, consider your risk tolerance, time horizon, liquidity needs, and market sentiment:
- Risk Tolerance: High float stocks are more stable and suited for risk-averse investors.
- Time Horizon: Long-term investors benefit from the stability of high float stocks, while short-term traders may prefer low float stocks for higher returns.
- Liquidity Needs: High float stocks offer better liquidity, making large trades easier without affecting the price.
- Market Sentiment: Low float stocks may provide opportunities in volatile markets, but they come with risks like market manipulation and limited liquidity.