Low-Float Stocks – Every Trader Should Understand This

Low-float stocks, as the name suggests, are stocks that offer relatively few shares for trading. Additionally, low overall trading volume, less liquidity, wide trading spread, and high volatility are also associated with low-float stocks. So, we can say that a few shares available for trading can make such stocks more enticing. However, they are riskier, and therefore, it is important to learn all about them before trading them.

If you want to know all about low-float stocks, you are on the right platform. There are multiple factors that you need to know about such stocks. To help you in this quest, we are going to cover all aspects associated with low-floating stocks. So, keep reading and learn all that you need to. Let’s begin right away. 

What does stock float mean?

Before understanding low-floating stocks, it is important to understand what stock float means. In simplest words, stock float refers to the number of shares of a company you can buy or sell on the secondary market. These are shares for the public and don’t include shares that directors and other officials of the company own. Additionally, shares under any kind of restriction aren’t also part of floating stocks. 

Now, if we look at the technical aspect, the stock float is of paramount importance. Traders and investors measure the liquidity of a company using stock float. Traders look at two aspects when analyzing a company. Firstly, they look at the total number of shares available for trading. Secondly, they also analyze stock float percentage as compared to the total number of outstanding shares of a company. 

Furthermore, a company may have a high-float stock or a low-flow stock. What are the differences between both, let’s see.

1. High-float stocks

A high-float stock refers to a stock that has a major portion of the total outstanding shares as freely-traded shares. In simplest words, high-floating stocks offer a huge number of shares for trading and insiders own comparatively fewer shares. For example, most S&P 500 companies have high float stocks. If you look at companies like Apple, Microsoft, Coca-Cola, etc. they have high float stocks. Millions of their shares are daily traded with high volume and higher liquidity. However, many other companies don’t have such a stockpile of shares available for trading. Yes, these are stocks with low float. 

2. Low-float stocks

Contrarily, low-float stocks have few shares for trading whereas insiders own a major share of the total outstanding shares. Furthermore, few shares for trading leads to low trading volume, and that in turn leads to less liquidity. However, volatility and trading spread are high for low-float stocks. In other words, such stocks are difficult to buy or sell and their prices may also rise or fall dramatically. 

Reasons for low-float stocks

Companies have low-float stocks no without any reason. There are several reasons behind a company’s low floating stocks. 

1. A significant portion of the company’s existing shareholders cannot sell their shares for a set period of time when the company issues stocks to the public for the first time. That means a company’s stock often floats low following the Initial Public Offering (IPO).
2. A company established and owned by a family often has low floating stocks. Insiders own a significant share of stocks whereas it issues fewer shares to the public. 
3. If there is a charitable foundation associated with a company, then the foundation owns a major share of the total stocks. 
4. Some companies also pay their employees with stocks. However, these stocks are restricted and cannot be freely traded until the end of the vesting period.

How to analyze low-float stocks? 

Understanding stock float is imperative in stock trading. High-float stocks are generally more safe stocks for trading. They have a huge number of shares for trading and have high trading volume, high liquidity, and low trading spread. Conversely, low-float stocks are risky. However, high risks may also accompany high rewards. As low floating stocks often offer high price swings and therefore, high rewards. Supply and demand play a key role in stock price fluctuations. A low-float stock offers very high returns when demand increases. On the flip side, it can also become trash when demand plummets. Therefore, it is important to analyze stocks carefully. So, how do you analyze low-float stocks? There are a few factors you need to consider when planning to trade a low-float stock. 

1. Price swings

As you know, stock float and price volatility have an inverse relationship. That means high float stocks have low swings in price whereas low-float stocks have high swings in prices. Moreover, comparatively fewer shares of low-floating stocks are traded on a daily basis. On the other hand, a huge number of shares of high-floating stocks are traded daily. 

2. Bid-ask spread

Furthermore, if we look at the bid-ask spread, low-cap stocks have wider trading spreads. Bid-ask spread is the difference between what a broker is willing to pay to buy stocks and the price it demands to sell. This is because low-float stocks are risky and therefore, brokers demand compensation for trading risky stocks. On the other hand, large-cap stocks have tight trading spreads. 

3. Trading strategy

Moreover, low-cap stocks are less enticing for institutional investors. Such institutions follow a buy-and-hold strategy and therefore, low-floating stocks are risky for them. They don’t even invest in such stocks when the company is promising and doing great business. What about day traders? Low-cap stocks are very much enticing for day traders. Day traders prefer financial instruments that offer high price swings and don’t hold assets overnight. That said, low floating stocks suit day traders. 

4. Relative volume

Relative volume refers to a case of increased trading as compared to the historical average daily trading. It is a good aspect for traders interested in low-cap stocks. When traders observe increased relative volume, they consider it a good trading opportunity. 

5. News events

Another key aspect is news events when analyzing low-cap stocks. Any news event about a low-cap company always has a big impact on its stock price. Therefore, day traders always look for news about such companies. The good news about the company leads to big price swings and traders are always on the hunt for such opportunities. On the flip side, bad news about such companies also has a catastrophic impact. 

What are the risks associated with low-float stocks?

Low float stocks are enticing for traders because of high price swings. However, they are highly risky and you need to do a lot of research. Always remember that trading isn’t all about buying and selling. How you analyze stocks is the key to success. Therefore always do your own research and don’t act impulsively on the basis of news.

Low-cap stocks are prone to manipulation. Stocks with low float make them vulnerable as influencers may look to take advantage. They may drive prices high with a promotion or other such efforts. It is easier because of the limited number of shares available for trading. For instance, if an influencer or a group starts commenting on a low-cap stock, what would be the impact? Obviously, the impact would be huge. Therefore, keep yourself aware of untoward or pump & dump schemes and avoid trading impulsively.

Tips for trading low-float stocks

As we mentioned in the previous section, low-float stocks are risky. However, they also offer higher returns. The key to successful trading is proper analysis. Here are a few tips for you to make better trading decisions. 

• Look at both news events and technical indicators when planning to trade low-cap stocks. 
• A daily look at the market news is the key to successful low-cap stock trading. It is crucial because enticing stocks of today may not be enticing for tomorrow. 
• Seeking advice from an expert financial adviser is prudent in this game. Only an expert can guide you to make better decisions and achieve your trading goals.
• Carefully decide how much money you can afford to lose because low-float stocks are risky and can cause significant losses. Therefore, always risk capital that is appropriate for your trading goals, age, and risk tolerance. 

Low-float stocks are stocks that have comparatively few shares available for trading on a daily basis. Insiders own a major share of the total outstanding shares of such companies. A fewer number of shares available for trading leads to less volume and less liquidity. However, price volatility and trading spread are high. Prices of low-float stocks can rise or fall dramatically within seconds or minutes. Therefore, they are risky and you need to trade them with a lot of care. Looking both at news events and technical indicators is the key. Additionally, taking expert opinion and assistance are advised to stay on the safer side. 

The wrap-up

Low-float stocks are stocks that have comparatively few shares available for trading on a daily basis. Insiders own a major share of the total outstanding shares of such companies. A fewer number of shares available for trading leads to less volume and less liquidity. However, price volatility and trading spread are high. Prices of low-float stocks can rise or fall dramatically within seconds or minutes. Therefore, they are risky and you need to trade them with a lot of care. Looking both at news events and technical indicators is the key. Additionally, taking expert opinion and assistance are advised to stay on the safer side.