What Is Stock Float? Definition, Example, and Related Terms

What Is Stock Float? Definition, Example, and Related Terms ...

The most liquid part of a company''s equity is floating shares.

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Contents

  • What Is The Float When It Comes to a Companys Stock?
  • The Float vs. Other Types of Shares: An Overview
  • What Is Float-Adjusted Market Cap?
  • Floating Shares Example and Walk-Through

When It Comes to a Companys Stock, What Is The Float?

The float refers to all outstanding shares that are available for public trading. This includes all shares held by public investors, but does not include restricted shares held by company insiders or treasury shares that are still locked away in the company''s treasury.

The more float (publicly traded shares) a company has, the less volatile its stock price tends to be in absence of other factors, and vice versa. This is because when a company has less public shares, the purchase or sale of many shares at once on the open market produces a more significant increase or decrease in market price. In other words, more float means more liquidity, and facilitates smoother trading.

This number of float shares may change over time for a variety of reasons. For example, many businesses offer stock options to their employees as an incentive. These options may be used once the stock options vest. These shares may be later used as restricted shares. This time, employees may be permitted to sell these shares on the open market, at which time they cease being restricted shares and start being part of the float.

An Overview of The Float vs. Other Types of Shares

It is necessary to understand what stock float is, how it differs from other types of shares. Generally speaking, it is critical to understand where shares come from and how they may affect them over time.

The following are important to understand the following categories of shares: authorized shares, outstanding shares, restricted shares, and floating shares (the float). How many of these types of stocks may be found in the shareholder equity portion of a company''s balance sheet.

The authorized is the largest stock category and includes both treasury shares and outstanding shares. Both restricted shares and float shares are also unavoidable.

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The broadest range of shares is the one that includes all other entities. When a corporation legally forms by filing papers of incorporation or a charter with the government, it outlines the total number of shares its leadership has authorized to issue. This is the maximum number of shares it may legally issue unless its board of directors (or shareholder vote) permits the issuance of additional shares in the future, which would be difficult.

All un-issued shares in a company''s treasury are included in the authorized stock, including any that are expected to serve as employee options, as well as all shares outstanding, both held by corporate insiders and those held by the public.

All shares that have been issued are outstanding. Any shares that are no longer in a company''s treasurywhether they are held by company insiders, institutional investors, or the publicare considered outstanding. Outstanding shares are multiplied by the current share price to determine a company''s market capitalization.

TheStreet Dictionary Terms

What Is Stock Float?Definition, Example, and Related Terms

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Restricted shares are unlisted and are not considered available for public trading. This usually means they are held by company insiders who are not yet permitted to trade them on the open market. Most restricted shares that begin as employee stock options eventually become unrestricted and then considered part of the float.

Floating sharesAKA the floating are those that are considered available for public trading because they are not in some way restricted or closely held by insiders or investors with controlling stakes. Since floating shares are highly liquid, they are sometimes used in an alternative calculation of a business''s market capitalization rather than outstanding shares.

What Is Float-Adjusted Market Cap?

Float-adjusted market capitalization is a measure of a company''s size or value as determined by the market, but unlike traditional market cap, it is calculated by only floating shares instead of all outstanding shares.

When it comes to public trading, many consider the float-adjusted market cap to be a more accurate measure of a company''s size/value. The S&P 500 (a popular bellwether stock index) for instance, examines its components companies by a float-adjusted market cap rather than a traditional market cap in an effort to give investors a clearer gauge.

Floating Shares Example and Walk-Through

In 1970, a fictional corporation called Acme Adhesives was just established. At the time of its incorporation, ten shareholders approved to hold 10,000,000 shares for their company. These 10,000,000 authorized shares will sit in their company''s treasury until they are issued elsewhere.

First, the ten Acme shareholders have decided to share 100,000 shares with each of them. This is, for example, 1,000,000 restricted shares that have now been issued out of the treasury. Now how are their shares counted?

  • Authorized: There are still 10,000,000 authorized shares because this number will never change (unless all of the shareholders get together and vote to authorize a change).
  • Treasury: There are now 9,000,000 shares in the treasury that have not been issued yet.
  • Outstanding-Restricted: There are now 1,000,000 outstanding shares that were issued to company insiders.
  • Float: There are (so far) zero outstanding shares issued to the public.

The shareholders decide to sell 7,000,000 shares to the public for trading. After a rainy day, they keep the remaining 2,000,000 shares in the treasury.

  • Authorized: There are still 10,000,000 authorized shares because this number will never change (unless all of the shareholders get together and vote to authorize a change).
  • Treasury: There are now 2,000,000 shares in the treasury that have not been issued yet.
  • Outstanding-Restricted: There are still the 1,000,000 outstanding shares that were issued to company insiders.
  • Float: There are now 7,000,000 outstanding shares that have been issued to the public.

After a decade of running Acme Adhesives, shareholders unanimously agreed that the number of authorized shares should be increased. They hold a vote among themselves to increase the company''s number of authorized shares by from 10,000,000 to 20,000,000.

The ten shareholders distribute 100,000 restricted shares from the treasury to each of themselves (1,000,000 total), and distribute more 7,000,000 shares from the treasury to the public as soon as the vote is approved.

  • Authorized: There are now 20,000,000 authorized shares after the shareholder vote to increase.
  • Treasury: There are now 4,000,000 shares in the treasury that have not been issued yet.
  • Outstanding-Restricted: There are now 2,000,000 outstanding shares that were issued to company insiders.
  • Float: There are now 14,000,000 outstanding shares that have been issued to the public.

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