What does Low Float Stock Mean? Definition & Examples

Trading concepts

Low Float Stock

Stock float, high float stock, and low float stock meaning are important to know in stock trading. Why so? Because stock float directly influences stock price as well as stock trading strategies. High float stocks attract medium or long-term traders. Whereas, short-term traders are usually more inclined to low float stocks. 

Do you want to know what role does stock float play in your stock trading? Then you don’t need to look anywhere else. We are going to help you understand stock float, high float stock, and low float stock meanings. The purpose of touching all three concepts is for better understanding. However, the main topic of discussion for today’s post is low float stock meaning.

Stock float meaning

A stock float means the total number of shares of a company that retail investors can buy or sell. It may be an absolute figure such as 100,000 shares or it may be a percentage such as 75% of the total 100,000 shares. 

High float stock meaning

High float stock means a large number of a company’s shares are available for people to buy or sell. It means there are lots of shareholders of high float stocks. Therefore, high float stocks are less prone to manipulation by big players such as large institutional investors. 

Low float stock meanings

Low float stock meanings are even more important to understand for stock traders because these stocks are important. Low float stocks are of companies that offer a limited or fewer number of shares for common investors. Typically, investors consider stocks as a low float when the available float is between 10 million and 20 million. Moreover, the stock float is substantially less than the total number of outstanding shares. Why so? Because companies with low float stock exclude insiders’ shareholdings as well as other restricted shares not available for the public.

Examples of low float stocks

Relatively very few listed companies have low float stocks. The reason is that the majority of listed companies offer millions, billions, or even tens of billions of stocks for common investors. Only a very small portion of total outstanding shares are restricted and not available to the public. However, there are companies that make a lower number of shares available to the public. For example;

  • Seneca Foods Corporation is listed on NASDAQ and offers only 740,000 shares for common investors out of 1.71 million outstanding shares. 
  • JW Mays Inc. is also listed on NASDAQ and offers only 390,000 shares for common investors out of 2.02 million outstanding shares. 
  • NCS Multistage Holding Inc. Is also listed on NASDAQ and offers only 570,000 shares for common investors out of 2.38 million outstanding shares. 
  • Seaboard Corporation is listed on AMEX and offers only 240,000 shares for common investors out of 1.16 million outstanding shares. 
  • Servotronics Inc. is listed on NYSE and offers only 840,000 shares for common investors out of 2.49 million outstanding shares. 

Low float stocks explained

Understanding low float stock meanings in-depth also helps you know several other things associated with low float stocks. For instance, why do these stocks appeal to day traders? 

Fewer shares available for common investors indicate buyers and sellers will be difficult to find. It leads to decreased trading volume but higher price spreads. In other words, volatility is high in low float stocks cases. That’s why such stocks attract more day traders who seek big price movements to gain more profit. 

Furthermore, day traders seek to capitalize on the supply and demand ratio when it comes to low float stocks. As there are very few shares available, a material event or big news about the company may accompany a substantial rise or decline in prices. That’s why high volatility is the key because it enables day traders to make quick profits. They can play on both sides of the pitch. How so? By buying low float stocks if they anticipate share price appreciation or by shorting stocks if they forecast a significant decline in prices. 

Types of low float stocks

To fully understand low float stock meanings, it is also crucial to know the types of low float stocks. The following are the types of low float stocks;

  • High-priced low float stocks – High-priced low float stocks are stocks with the low float but have high share prices. For example, Amcon Distributing, listed on AMEX, has low float stocks but has a +100 plus share price.
  • Low-priced low float stocks – Low-priced low float stocks are stocks with low float as well as low share prices. For example, AeroCentury, listed on AMEX, has low float stocks and also has low share price – trading around $8 per share.
  • Penny stocks – Penny stocks are also low floating stocks with significantly low share prices. For example, China Pharma Holdings, listed on AMEX, has low float stocks with very low share price – below $1.

Why do companies float limited stocks?

Now, it is also a part of understanding low float stock meanings to know why companies float limited stocks. There are several things that companies consider. In fact, you will rarely find a new company floating all its stocks in an initial public offering (IPO). Instead, new companies offer a small portion of outstanding shares and the majority of shares are held by insiders. For example, Robinhood offered only 7% of its outstanding shares in the IPO. There are several reasons behind this decision such as;

  • The management may think that the market may not be able to absorb all the shares of their company. Therefore, they should offer a small percentage to the public in the IPO. 
  • Insiders don’t agree or consider it befitting to sell all shares in the IPO. 
  • The management may use low float as a strategy to boost stock price because a few enthusiastic investors may exhibit more excitement. 

How can you find low float stocks? 

You can find low float stocks by using a company’s balance sheet. The shareholder equity section gives you information about total outstanding shares and floating shares. You can also use stock screeners to find companies with low float stocks. These tools enable you to set parameters of your choice such as trading volume, floating shares, outstanding shares, etc. to find stocks of your choice. 

The importance of low float stocks

Knowing low float stock meanings in a better way also makes you understand the importance of low float stocks. 

Firstly, it is crucial to look at the float when considering buying shares in a company’s shares you haven’t traded before. You can find out how many shares that company has made available for common investors. Low float stocks usually make it very difficult for investors to enter or exit trades at the desired price because of lower float. 

Secondly, low float stocks have very low volatility and that’s why it often makes it difficult for traders seeking a large position. Similarly, they are also a hindrance to active trading because of difficulty in entering or exiting a position. 

Thirdly, it is also important to note that large institutional investors don’t fancy low float stocks. Why so? Because of low volatility as they trade in bulk and in case of low volatility, it gets very difficult to trade in bulks. Moreover, big players also don’t prefer stocks that bring large price swings. Large institutional investors prefer high liquidity and price action patterns that are predictable. 

So, what can we deduce from the prior discussion? We arrive at a conclusion that low float stocks are more attractive for day traders. Day traders seek opportunities to make a profit in a very short period and low float stocks offer them such opportunities. 

Tips for trading low float stocks

So, if you are a day trader and looking to capitalize on big price swings associated with them, then you need to be careful. Although these stocks offer substantial gains in a relatively short period, they also carry huge risks. Their prices may also substantially decline as well. Here are a few tips if you want to explore opportunities presented by low float stocks. 

  • Firstly, find out low float stocks by using stock screeners and determine the total number of stocks available for common investors. 
  • Be patient, start with a small amount, and learn all about how low float stocks behave before putting too much money at risk. 
  • Do your research to compile a list of stocks with price action patterns that indicate upcoming large price swings. 
  • Don’t ever hold low float stocks overnight because such stocks are unpredictable and may wipe out your entire profit, even your original capital. 
  • Carefully decide your stop-loss before entering a position. That means thinking about an exit strategy before entering strategy.
  • Stay tuned for news events that can influence the stock price of companies with low float. 

Advantages and disadvantages of low float stocks

Low float stocks also offer advantages as well as accompany disadvantages.

Advantages

  • Low volatility may bring large price swings and that means higher gains.
  • New catalysts like positive news and events lead to substantial upward movement.
  • Positive news and events may also result in increased liquidity. That gives traders the opportunity to exit positions with profits. 
  • Traders have the advantage of playing on both ends of the pitch. They may buy stocks prior to price appreciation or go short if the stock price declines. 

Disadvantages

  • Lower liquidity makes it difficult for traders to enter or exit positions. 
  • Lower volatility also increases the chances of huge losses.
  • Low float stock trading also requires a more careful and vigilant approach because of lower volatility. 

The wrap-up

Understanding stock float meaning, especially low float stock meaning, is important. It helps traders trade in a better way. Low float stocks are stocks that have a lower number of available shares for common investors. They have lower volatility that brings numerous advantages as well as disadvantages. Moreover, low stock floats are more enticing for day traders whereas big institutional investors don’t fancy them. If you are a day trader, you should be very careful before investing in low float stocks because they may also cause huge losses. We are sure that our today’s guide on low float stock meaning will help you understand all you need to know about such stocks. 

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