After an initial public offering, private companies are listed on stock exchanges. Public offerings generally consist of a combination of new issue and offer to sell. This is basically a stake sale by promoters or existing shareholders. The public can trade the shares of a company after an IPO. Contrary to popular belief the public is not permitted to trade large amounts of shares listed companies. Although there are no legal restrictions, many companies manage the supply of shares on the market. Floating shares are an important component of the market's demand and supply.
Before we get into the specifics of floating stock meaning, let's look at some related terms. There are three terms that can be used to describe a stock company: floating shares, floating stock or outstanding shares, and authorized shares. The shares outstanding are the shares that a company has issued and is actively held by shareholders. This is a more general term. It includes stock options that employees may have. Stock options may be converted into equity shares at a later date, but they are not fully issued so are not included in the outstanding shares.
Once you have a good understanding of the outstanding shares and authorized shares, it is time to ask what floating stock is. The total number of shares that are available to trade on the open market is called the floating stock. You can determine the floating stock by removing shares that are held closely and removing restricted stock. Many listed companies have large shares held by shareholders, employees, and company insiders. These shares are usually held for a very long time and not traded often. Sometimes, temporary restrictions may be placed on trades of certain shares. These shares are part of the restricted shares category.
A company's floating stock is basically the share that can be traded easily by all shareholders, without restrictions. Companies with large floating stock are those that have a lot of it. Companies with low floating stocks, on the other hand, are called low-float. Low float companies may have large numbers of outstanding shares, but less floating stock. A company XYZ might have 10 million shares outstanding. Institutional investors could hold 4 million shares, while management and other related parties might own 3.5 million. Employees may have 1.5 million. Trading in the open markets would only be possible with a mere 1 million, or 10%.
Investors, particularly small ones, are very concerned about the company's free float. Companies with low float stock tend to be more volatile and have higher spreads. Low float shares are held by few entities that may not be open for frequent buying or selling. Common investors may have difficulty entering and exiting low-float stocks. Because there are less shares to trade, large institutional investors tend not to invest in companies with low float. A low floating stock can reduce liquidity and impact the share price if a large amount of shares is bought.
The number of companies with floating stock changes constantly. The actions of large investors and the company can cause floating stock to rise or fall. If a company issues new equity, or promoters reduce stake through an offer to sell, the floating stock may increase. In the open market, large investors and insiders of the company may sell their shares to increase the supply. A company might also opt for a share purchaseback, which will decrease the stock's floating price.
Indian companies generally have a low float, except for a few exceptions. Indian companies generally have a high promoter hold as this allows them to exercise control over the company but also reduces the number of shares on the open market. You can invest in companies with low floating stock but you should be cautious about sudden price fluctuations. As manipulation of stock prices is possible, it's best to avoid small companies with low stock floating.