Key takeaways
- Free float stocks are the shares that a company can trade publicly in the secondary market.
- Free float stocks help us determine the company’s volatility.
- Investors prefer to trade where free float stocks are larger in number so they may be able to trade substantial amount of shares.
What are free float stocks?
Free float stocks are also known as ‘Public float’ and are the shares that a company can trade publicly in the secondary market. These shares are not held by insiders and thus – are not restricted.
Calculating Free Float Stocks
Calculating Free float stocks is fairly simple and is done by the following formula:
Free Float Stock = Outstanding shares – Restricted Shares – Closely held shares
In the given formula, outstanding shares are the number of shares held by all of the company’s shareholders, restricted shares are the shares that are not transferable, meaning that they are held by corporate management of the company and lastly, closely held shares are the ones that are held for a long-term basis.
Understanding Free Float stocks
Free float stocks help us determine the company’s volatility. Companies with larger numbers of free float stocks are generally considered to be less volatile. Conversely, companies with smaller numbers of free float stocks are considered to be more volatile, showing very limited liquidity and wider bid-ask spread due to less number of stocks available for trading. Thus, free float stocks are observed very closely by investors, as they are considered to be an important metric in picking out stocks. Usually investors prefer to trade where free float stocks are larger in number so they may be able to trade a substantial amount of shares without letting it impact the company’s share price.
Free float stocks lead an organization to gain access to new sources of capital by allowing public investors to invest their money into the business – which then can be used for expansion and development of business. This in turn would help increase the company’s profits.
