What Are Low Float Stocks?

Many factors influence stock prices and how quickly they move up and down. While a company's financial performance and macroeconomic forces play large roles, investors should also pay attention to volume. Stocks with lower volume and a smaller number of shares can exhibit more volatility than others. Knowing how low-float stocks work can help investors generate higher returns and hedge their portfolios.

What Are Low Float Stocks?

Typically, traders consider a float between 10 million and 20 million shares as low.

Buyers and sellers may be difficult to find with fewer shares available. That can mean bigger price spreads and decreased trading volume. Stocks with high market caps tend to have more float than micro-cap stocks.

The larger price spreads of low float stocks may mean increased volatility. For that reason, these stocks hold appeal for day traders who look for sharp price fluctuations to capture fast profits. However, profit guarantees don't exist with these stocks. In fact, volatility can end up as a trap for traders.

News events often cause low float stocks to make big moves. That's true on both the upside and downside, meaning traders must use caution. The stock can move quickly in the opposite direction.

You should watch for patterns or setups on a chart when considering a position in a low float stock. Holding overnight may add risk. You may want to opt for quick exits to minimize exposure to news or other events that could serve as catalysts for large price fluctuations.

How to Find Low Float Stocks

You can identify a stock's float on a firm's balance sheet. In the shareholder equity section, you will find the number of the company's shares outstanding as well as the floating shares.

Many stock screening software tools allow users to filter for stocks with a low float. This is useful for day traders seeking securities with the potential for a fast gain.

You can set parameters for characteristics such as:

• Trading volume
• Total shares outstanding
• Floating shares

How Low Floats Stocks Work

The term "stock float" refers to the number of shares available for the public to trade.

It excludes insider holdings as well as restricted shares.

For example, let's say a company has 50 million shares outstanding, which isn't the same as its float.

At most companies, not all shares end up available on public markets. For example, many corporations offer restricted shares to managers and employees as part of a compensation package. These shares can't be sold until a specified date. That means a stock's float may be much smaller than its market capitalization.

Float can be a concern for big institutional investors, who typically look for liquidity. Even with lower float stocks, significant institutional ownership tends to dampen volatility. That's because institutions like banks, mutual funds, hedge funds, insurance companies and others typically hold longer and cannot trade in and out as quickly as individual investors.

When institutions own most of the float, the stock price tends to be less volatile.

Low Floats Stocks Relative Volume (RVOL)

Trading volume refers to the number of shares changing hands during a particular timeframe, such as during an hour, day, week or even a month.

It's a measure of liquidity, which indicates how easy it is to find a buyer or seller for the opposite side of your trade.

Relative volume is a ratio that indicates how volume in different time frames stacks up against one another.

For example, let's say you're looking at a stock that averages 1 million shares traded per day over the past month. Today, you notice that 3 million shares have moved.

In this case, the RVOL indicator is 3, as the stock is trading three times the average volume. Look for an RVOL greater than 1.5 or 2 to indicate big interest in the stock.

Types of Low Floats Stocks

Low float stocks have a smaller number of shares available for trading relative to other stocks.

Types of low float stocks include the following.

• High-priced stocks: Companies with high market prices (i.e., over $100 per share) that have low floats. 
• Low-priced stocks: These stocks trade for roughly $5-$10 and have low floats.
• Penny stocks: These stocks trade for under $5 and can even fall below $1 per share. Penny stocks tend to have low floats which makes them more volatile.

These stocks have volatility and wide price fluctuations in common. You can't tell anything about a stock's float by looking at just the price.

Importance of Low Float Stocks

When considering whether to buy a stock, it's important to look at the float, which indicates the number of shares available for the general public to trade.

For traders wanting to take a large position or act quickly, low float may be a hindrance, as sparse activity in a stock often makes it tough to enter or exit at the price you want.

Low float is typically an impediment to active trading. This lack of trading activity can make it difficult for investors to enter or exit positions in stocks that have limited float.

Big institutions that make up the bulk of trading throughout the market generally steer clear of low float stocks because of this limited liquidity. These institutions also don't want the large price fluctuations that often accompany low float stocks.

Big institutions such as banks, hedge funds, mutual funds or university endowments demand liquidity and a more predictable pattern of bid-ask prices. In practice, this means low float stocks are often the purview of day traders and a very small number of institutional holders.

Mutual funds, pension funds and insurance companies that buy large blocks of stock invest in companies with a larger float. If they invest in companies with a big float, their large purchases will not impact the share price as much.

Recommendations for Trading

If you understand the potential for risk in low float stocks and decide to trade in that arena, check out these tips:

• To determine a stock's float, find the total number of shares outstanding and subtract the number of closely held and restricted shares.
• Start small and learn how low float stocks behave before putting more of your money at risk.
• Keep a list of stocks with chart patterns that seem suited to a big move.
• Avoid holding low float stocks overnight, as you may subject yourself to big price fluctuations and wipe out any gains.
• Plan your exit before you buy. Have a target price and a stop-loss price.
• Watch for news events that could drive upside price action on stocks on your list.

Pros and Cons of Low Float Stocks

As with any other investment or trade, low float stocks have pros and cons.

Market Capitalization Related to Stock Price

Generally speaking, stocks with a small market capitalization show more volatility than larger peers. Some small-cap stocks can move 20% or more in 1 session.

You can find a stock's market capitalization by taking its share price and multiplying that by the number of shares outstanding.

For example, let's say a company's shares are priced at $10 and it has 30 million shares outstanding. That gives it a market cap of $300 million.

Apple (NASDAQ:AAPL) has a market cap of more than $2 trillion. It's rare to see Apple's stock make a huge intraday price swing.

A stock is typically considered a small-cap if it has a market cap between $300 million and $2 billion. Those stocks are often more volatile than a big company like Apple.

Penny stocks, which trade at very low prices and aren't typically widely owned by big institutions, are prone to wide intraday price changes.

That can benefit traders who move fast and capture gains. However, those price fluctuations can also harm traders who get swept up in a downdraft.

Best Brokers to Find Low Float Stocks

These are some of the top brokers to consider for low float stocks.

Getting Started with Low Float Stocks

Low float stocks offer traders an opportunity to nab intraday profits. By developing a watch list of stocks set up in potentially constructive chart patterns, you can jump in before a big move. At the same time, volatility and the potential for wide price swings may bring both pros and cons to traders. Exercise caution when trading low float stocks. You may want to avoid holding for too long or risk getting shaken out in a sharp downturn.

Frequently Asked Questions