Trading and investing in stocks has been trending for a few years, especially now that people are becoming more finance-savvy. There is so much to know about stocks and trading and stuff that it can make your head spin. But let’s try to break it down that even an eight-year-old can understand it. Let’s start with the basics.
Float stocks in a nutshell
Each company holds a number of shares. They may keep the shares for themselves (i.e. the owners), which we call outstanding shares, or they may choose to let others buy some. In cases when a company sells shares, you’ve got different kinds. First, you’ve got closely-held shares, which may be bought by shareholders, employees of the company, or insiders. Second, you have what you call restricted stock, which cannot be sold most likely because of an IPO restriction. Lastly, you’ve got stocks which are called low float stocks or floating stocks or float. These stocks are traded publicly. In general, it is the company’s discretion how many shares they would like to sell. Because of this, floating stocks may be very much in demand because of its limited quantity over a period of time.
However, there are instances when a company may increase the availability of floating stocks. It may be due to a second round of public offering (some companies do this to raise funds for a company acquisition or to grow the company), when employees use their stock options, when there is a share buyback, or when a company does a share split.
And following the law of supply and demand, not to mention the viability or popularity of the company selling them, the price of floating stocks can be quite high. But there are floating stocks that are very cheap, especially those coming from small companies selling a limited number of shares.
Low priced floating stock mean extreme volatility
Interestingly though, these low-priced floating stocks may be volatile. And when we say volatile, imagine extreme highs and extreme lows in a short period of time. To give you a clear picture of it, imagine a share worth USD 4 become USD 100 and go down to USD 10. All in a span of a few days. So brokers and investors are usually on the lookout for these floating stocks because of the possible yield at the end of the day. But tread with extreme care and caution because just like Goliath, as they say, the bigger they are, the harder they fall. You have to know what you are doing, closely monitor trends, and be able to forecast how floating stocks will perform in a day or two.
There are online stock screeners and scanners that give a heads up on possible floating stock winners. There are also websites that share their watchlist of floating stocks. Then there are stockbrokers who give financial advice and help average Joes manage their financial portfolios and choose how to invest in stocks. Before you get your feet wet, just make sure you read up and get sound advice lest you lose money in stocks.