What Is A Low Float Stock: Trading in the share market points to buying and selling of shares on the same day. Intraday traders or day traders tend to seek help from technical indicators to make huge profits.

They try to monitor charts and implement momentum strategies to make sound profits. Day traders square off their positions at day’s end. Intraday trading involves monitoring stock markets closely and regularly in comparison to long-term investing.

A question that is often asked by new entrants is, “How much one can earn in the stock market?” Well, there is no right answer to this question. There are people earning lakhs, and there are individuals who are happy by earning thousands too.

However, some individuals tend to lose their entire invested capital in the stock market. Therefore, appropriate strategies are required to be formulated to make profits.

For example, intraday traders closely track the stock’s volume at the time of using technical indicators. The liquidity of the stock is of utmost importance.

Market liquidity is critical for several reasons, principally because it impacts how quickly an investor can open and close his/her positions. A liquid market is associated with less risk.

This is because someone is always willing to buy the share and a buyer doesn’t need to cut down the price of the asset to make it attractive. A stock’s liquidity can be examined by a stock float.

There are stocks having a high float, while some stocks have a low float. New entrants in the world of stock market investing ask, “What is a low-float stock?”

This article will focus on the concept of low-float stock. Read on to find out what is a low float stock, and the possible reasons behind low float stocks.

Understanding Low-Float Stocks

Low float stocks are nowadays becoming a popular type of investment for intraday traders since these stocks allow them to earn significant profits. Let us quickly explore what is a low float stock, some ways to find them, and some risks and benefits.

The float of a stock measures the number of shares of one particular stock. It gives an idea about the number of shares of stock that are available for trading.

This measure doesn’t consist of closely-held shares, shares owned by controlling investors or company owners. Floating stock is arrived at by subtracting closely-held shares and restricted stock from the company’s total outstanding shares.

Closely-held shares are referred to as those which are owned by insiders, major shareholders, and employees. Restricted stock refers to insider shares that cannot be traded due to a temporary restriction, like the lock-in period after IPO.

Low float stocks are those having a lower number of shares. A low-float stock will generally be more volatile in comparison to a stock having a large float. 

Since the number of available shares is few, it is harder to find a buyer or seller. Therefore, this results in significantly larger spreads and often lower volume. Investors find it difficult to enter or exit positions in those stocks which have a low float.

Trading Low-Float Stocks

More often than not, low-float stocks principally benefit intraday traders who are interested in earning significant profits in a short time. By their very nature, low-float stocks tend to be volatile.

There are relatively few low-float stocks available in the secondary market, and prices of such stocks tend to go up and down easily and quickly.

Before placing a trade in a low-float stock, it is of utmost importance to know that every trade of a low-float stock will have a larger impact on the stock’s value than it will have on a stock having a higher float. 

For example, when good news related to the low float stock hits the market, it will not take much time for it to have a significant impact. Low-float stocks result in gigantic gains when demand for such stocks increases.

Conversely, if bad news about the same security comes, the price will fall rapidly. This dramatic volatility in low-float companies can result in a greater level of risk.

However, an experienced and highly skilled day trader can be delighted to take on this challenge as he/she knows that potential gains are much higher.

If an investor considers making an investment in a particular company, it is of utmost importance to understand the stock float. Individuals have to consider this while they perform due diligence on an issuing company.

This is because the size of a stock float can change, affecting the stock’s liquidity and volatility. Stock buybacks, secondary offerings, buying or selling of shares by an insider, splits, etc. can change the outstanding shares.

Therefore, this change can change the stock’s float.

Reasons For Low Float Stock

Now that we have understood what low float stock is, it is important to look at the reasons why companies have low float stock.

Low float stocks have higher spreads and volatility in comparison to larger float stocks. As a result, an investor might find it hard to enter or exit positions in such stocks. 

1. Special Purpose Acquisition Companies (SPACs)

Shares of stock can be low floating as the company is issuing the shares as part of SPAC (special purpose acquisition company). This is a sort of corporation which gets formed for the only purpose of raising investment capital through IPO.

More often than not, experienced and renowned business executives in a similar industry as SPAC’s target acquisition are the founders of SPAC.

When a new company goes public, limited shares are available for public purchase as they are held by founders of the SPAC or some other insiders.

2. Family Businesses

Another common reason for low float stock can be if it’s a family business. In such cases, the family tends to own a significant share and they take important decisions, such as electing a chairman.

Therefore, a family-operated company has a few shares left for the general public to purchase.

3. Stock Buybacks

If a company plans to buy back some shares, it will affect its float as the number of shares available for trading gets reduced. Share buybacks and dividends are 2 ways that a company uses to reward its shareholders.

Sometimes a company decides to buy back its shares so that it can have better control.

Also Read: How To Identify Liquid Stocks And Trade Them? – A Handbook to Liquidity!

To Sum Up

The term “low float” points to the number of shares that are available to trade in the public market after an appropriate number of shares are given to the founders and insiders of the company.

Every investment carries some amount of risk, but low-float stocks can present some particular challenges. Intra-day trading is extremely risky and a trader can end up suffering significant losses (and gains).

Therefore, investors having a lower risk appetite should consider investing for the long term. Stocks having low float can have high volatility, and their prices can change within seconds or minutes.

Therefore, if an investor isn’t careful or knowledgeable about it, this volatility can wipe out a significant portion of a portfolio. That’s all for the article on What Is A Low Float Stock, We hope you enjoyed reading it. Happy Investing!

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