Float is the number of shares actually available for public trading: shares outstanding less those held by insiders, founders and other restricted holders. It matters because price is set by the shares that can change hands, not by the ones that exist.
Float versus shares outstanding
Shares outstanding is every share in existence and is the figure used for market capitalisation and per-share results. Float excludes the blocks that are not realistically for sale: founder stakes, insider holdings, employee shares still subject to restriction, and strategic holdings.
A company can have 100 million shares outstanding and a float of 20 million if founders hold most of it. Its market cap is calculated on all 100 million, while its daily price is set by trading in the 20 million.
Why low float makes prices violent
With few shares available, a given amount of buying or selling moves the price much further. The result is wider spreads, larger daily swings, and prices that can detach from any sensible view of the business for extended periods, in both directions.
This is mechanical rather than informational. A low-float stock doubling tells you about the supply of shares, not about the company. For a long-term investor the practical consequences are that entering and exiting costs more than the quoted price suggests, and that volatility says less than usual about what is happening in the business. See Mr Market for the disposition that helps here.
Lockups, and the supply that arrives on a schedule
After an IPO, insiders are typically restricted from selling for 90 to 180 days. When that lockup expires, a large block of shares becomes eligible to trade at once, sometimes multiplying the float. Expiry dates are disclosed in the prospectus and are among the more predictable supply events in markets.
The same effect appears with secondary offerings and with large vesting events, which is where float and dilution meet: dilution adds shares to the total, and a lockup expiry moves existing shares into the tradeable portion. Both increase the supply someone must absorb.
What it means for a long-term investor
Float is a market-structure fact rather than a business quality, so it belongs in the how-you-buy column rather than the should-you-own column. It argues for limit orders rather than market orders in thinly traded names, for sizing positions with the knowledge that exiting may be slow, and for discounting price action that has no news behind it.
High insider ownership, which reduces float, is usually a positive on alignment grounds. See insider ownership for what that does and does not tell you.
Judge the business, not the share supply
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Frequently asked questions
Related
- Market capitalization, the figure calculated on all shares, not just the float.
- Dilution, the other way share supply increases.
- Insider ownership, the holdings that sit outside the float.
- Mr Market, how to treat price moves that have no news behind them.