Low Float Stocks
Sometimes, when you’re just starting out in the stock-trading business, it can be intimidating. Many are hesitant to ask the questions that they should ask as newbies. They might think they should already know this, and pride gets in the way of education. Here we will discuss low float stocks
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The folks at StockstoTrade expect you to ask questions and no question is a stupid question. We’re all about education, and we’re all about starting from scratch.
So here are 6 things that we think beginners are too afraid to ask:
#1 What is market capitalization and how do I calculate it?
Market capitalization is one of the most fundamental concepts of modern trading. It represents the total value of a company in the stock market and serves as a rough measure of its power in shifting trends on Wall Street. Calculating it is really simple: multiply the current stock price by the total number of outstanding shares. The figure, with the correct currency symbols and commas, is a general statement on the value of the corporation’s assets.
#2 How does market capitalization relate to stock price changes?
If the metaphorical Company Inc. has 1 million shares outstanding and is currently trading at $1 a share, then Company Inc.’s market cap stands at $1 million. One of the reasons we like low market cap stocks relates to the rise of stock prices as the company develops its core business. Suppose Company Inc. is worth $1 million today. Then, the CEO issues a press release about his great new product and since he was so eloquent, the market responds quite positively. Key traders start buying up his stock, pushing prices to $2 a stock. The executive has just doubled his market cap to $2 million through a quick press conference!
#3 Are all “outstanding shares” the same?
Companies are made up of freely tradeable shares as well as institutionally owned and insider-owned shares. We don’t necessarily care about insider-owned and institutionally owned shares, because they aren’t liquid. If it’s an institution, like a mutual fund or a retirement account scheme, those entities are not actively trading the stock. They are holding it and sitting on it for long-term growth. Insiders–otherwise known as CEOs, CFOs, and other members of the C-suite–typically own a lot of shares as well. Those are usually “locked up,” only to be sold during certain periods of the year. These stocks are counted against the total number of “float” shares, which are available to be freely traded on markets at the whim of buyers and sellers. You want a lower float to create a more reactive and volatile stock in the early period of a company’s life on the stock market. When news of a big research and development breakthrough hits the press and everybody wants in, the less the supply, the greater the volatility. That is one of the many beauties of low float stocks, because if you are an Apple-sized company and have 15 billion shares outstanding, it is so much more difficult for that stock to make substantial moves.
#4 How volatile is too volatile?
Volatility is not always a positive thing. Purposely crafting a stock to be highly reactive to press statements or other kinds of market movement can backfire. Take the fate of DryShips Inc. Last November, the shipping firm’s stock price fluctuated from under $4 to over $100 to below $10 again in just a few days. Other companies in the same genre rode a similar roller coaster because they employed a similar strategy to amplify the effects of market changes on their total market capitalization.
In the medical industry, pacemaker developer Enteromedics saw its stock price jump by 1,320 percent during the first week of the year. GenVec Inc and Signal Genetics saw an over 300 percent increase in share prices as well, without any significant news from the company’s leadership. This is because the float had fallen so low, that a trade of just a handful of shares had an overwhelming effect on stock price. At the time of the hikes, GenVec only held 1.8 million floating shares, while Signal Genetics held a meager 546,000 shares.
#5 How many floating shares before a company isn’t “low-float” anymore?
There is no set definition for what companies qualify to be in the “low float” category. Every trader has his or her own rules for their low float strategy, but usually the bar hangs around 10-20 million freely-traded shares.
#6 Could the number of floating stocks increase?
The number of floating stocks does have the potential to grow as institutions or insiders open up their “locked up assets.” A company could decide to sell its shares in a secondary IPO in order to raise cash for an acquisition or merger. Or employees could elect to use their stock options, cashing in on growth to pay for a new home, car, or an early retirement. The CFO’s team could also decide to raise the total number of stocks through dilution, in order to get out of a particularly dire financial situation or to fund an ambitious new project.