Why I look at float for every stock
For the new traders confused by the float discussion this post might answer some questions.
Float is the number of shares actually available for trading in the open market. To understand float you need to understand authorised shares, treasury shares, outstanding shares and restricted shares.
Authorized shares are total number of shares authorized by shareholders. Companies do not issue all authorized shares and retain some in treasury. Which are called treasury shares. The issued shares constitutes outstanding shares. The shares issued to insiders, favored parties, employees are typical the restricted shares, which have certain restriction in terms of ownership and when and how they can be sold. Float is the number of shares after restricted shares are removed from the outstanding shares.
Let up take a hypothetical company Trader Mike Inc. which derives its income from trading, advertising, sponsorships and strategic investments in start ups.
Authorized shares= 25 million
Treasury shares= 5 million
Outstanding shares= 20 million
Restricted shares= 10 million
Float= 10 million
Why is float important, because it impacts supply and demand. As a general rule low float companies are more volatile and make extreme moves in either direction on good or bad news.
If you want to gun for high returns, looking at low float companies with excellent earnings is one way. As more institutional players want to own them, a small float makes them difficult to accumulate. This is what leads to them making significant moves. e.g. GROW which was one of the best performer stock last year has a float of only 6 million. That also after a 2:1 split in beginning of year.AXR another stock which made 500% plus move last year has a float of 1.8 million. MWRK which was another 400% plus mover had 5.6 million float.
Similarly if you study stocks which have made major moves, you will typically find stocks with low float dominating the list. Now there was an aberration during the dot com boom where new IPO's came out with higher floats and sometime went up many fold, but as we all know that was irrational exuberance.
Lets look at some recent data from my trading universe and scans:
Out of 80 Stocks up 200% plus from low in 260 days there is only 1 stock which has 100 million plus float, CHTR, Charter Communications Inc.
Out of 338 stocks up 100% plus in 260 days from low there are only 16 stocks with 100 million plus float.
Out of 81 stocks up 25% plus in a month there are only 3 stocks with 100 million plus float.
Only 73 stocks out of 862 stocks up 25% or more in this quarter has 100 million plus float.
Now I have this data for number of years and has studied it in great details. My findings are no different from anyone else who has studied the data, in most periods low float stocks significantly outperform high float stocks if they have a catalyst like earnings. Now that is another advantage for average speculators against the big speculators who by virtue of their size cannot focus on low float stocks.
Obviously if you are very short term trader all that matters to you is liquidity and range. So for day traders stocks with high float and large range like GOOG are very good and you can make lots of money just trading day in and day out that one stock. But as a general rule if you are long or intermediate term trader and if you want to improve your returns significantly , pay close attention to float.