When it comes to trading low-priced stocks, you gotta look at the float. So what exactly are low float stocks?
These are the stocks that have the potential for massive price moves in a single trading day … Low float stocks are what many seasoned day traders look for each morning…
And that’s just the tip of the iceberg. There are so many reasons you must learn about float and how to trade low float stocks.
These stocks — due to a simple economic reality — have the potential to move 10%, 20%, or more in a single day. They can be amazing to trade. In fact, we stalk them every trading day in our SteadyTrade Team community.
If you need to know how to scan for low float stocks or want tips for trading them, this post is for you.
Let’s get straight to it…
Table of Contents
- 1 What’s Considered a Low Float Stock?
- 3 How to Find Low Float Stocks
- 4 Why Are Low Float Stocks Great for Trading?
- 5 How to Trade Low Float Stocks
- 6 6 Things Beginner Traders Want to Know But Are too Afraid to Ask…
- 6.1 #1 What Is Market Capitalization and How Do I Calculate It?
- 6.2 #2 How Does Market Capitalization Relate to Stock Price Changes?
- 6.3 #3 Are All “Outstanding Shares” the Same?
- 6.4 #4 How Volatile Is Too Volatile?
- 6.5 #5 Could the Number of Floating Stocks Increase?
- 6.6 #6 When Isn’t a Company Low Float Anymore?
- 7 Use StocksToTrade to Find Low Float Stocks to Trade
- 8 Conclusion
- 9 One Platform. One System. Every Tool
What’s Considered a Low Float Stock?
What does low float mean in the stock market? Low float stocks have a small number of their shares freely available for trading.
The stocks can often be highly volatile with the potential for tremendous trading opportunities. If you day trade or want to day trade, you need to understand how low float stocks work. Let’s first start with…
On a company’s balance sheet, under the “Capital Stock” section, you’ll find the number of shares outstanding. That’s a company’s entire collection of shares. For example, a stock’s price may be $10, with the total amount of outstanding shares being one million.
This means that there are one million shares, each worth $10, giving the entire company a value (also known as the market cap) of $10 million.
But for most stocks, not all shares can be freely traded. Often, company management, employees, and major investors have a chunk of restricted stock or shares that they can’t sell.
For example, sales managers may receive shares as part of their compensation on top of a salary, but they may not be allowed to sell them for a few years. Those shares count as restricted stock.
The shares that can be freely bought and sold are referred to as ‘floating shares’ or ‘the float’.
Anyone can buy these shares — individual traders or investors, investment firms, banks, or trading groups. And shareholders can sell these shares at any time.
A Quick Note on Low Float Stocks
Wondering where you draw the line between a low float stock, medium float, or larger float stock?
Here’s the general rule in the day trading community: a stock with a float of 10–20 million shares or less is considered a low float stock.
How to Find Low Float Stocks
You gotta know how to determine a stock’s float. It’s pretty easy…
First, you need to know the total number of outstanding shares of a company. Second, you need to know the number of restricted shares. Both will be listed on the company’s balance sheet.
Then, subtract the number of restricted shares from the number of outstanding shares. The result will be the number of floating shares.
Outstanding Shares – Restricted Shares = Floating Shares (The Float)
Why Are Low Float Stocks Great for Trading?
One of the most common opportunities day traders search for every day is the low float runner.
Low float stocks are great potential trading candidates because they can be highly volatile. Savvy, prepared day traders can potentially grab moves of 10%, 20%, 50%, or more in a single trading session.
These wild moves come down to supply and demand.
When there’s more demand than supply, prices rise. If there’s massively more demand than supply, prices can move a huge amount.
Imagine a bunch of traders all want to trade the same hot low float stock — that’s the demand.
Since there aren’t many shares — the supply — available, the demand quickly outstrips the supply. The stock price takes off like a rocket.
Example of a Low Float Stock
Enough theory, let’s look at a real-life example of a low float stock — Francesca’s Holding Corporation (NASDAQ: FRAN).
This stock has been mentioned a few times on our weekly watchlist (There’s no cost to sign up. Get our weekly watchlist in your inbox every Sunday.)
As of this writing, FRAN has a float of just 2.14 million shares. With such a tiny amount of shares freely traded, we’ve seen this stock make huge price moves around company-related news stories.
For example, we saw the stock more than double in price in a single day in early July. That’s why active traders love low float stocks…
How to Trade Low Float Stocks
Trading low floaters can be amazing if you’re trying to grow a small account, but you need to adapt your trading strategies to suit these stocks.
Here are my three top tips for trading style for low floaters.
#1 Look for News Catalysts
Most amazing trades start with a big catalyst. That can be a news story, major rumor, social media buzz, or SEC filing.
But when the stock has a low float, the right catalyst can mean major stock price movements.
It goes back to supply and demand. When a lot of traders get excited about a stock, but there aren’t a lot of shares available, prices are bound for a huge move.
Be sure to watch for catalysts related to your favorite low float stocks each day. Check out StocksToTrade’s Breaking News chat feature that can help you catch the news that really can move stocks. Learn more about it here.
#2 Use a Low Float Stock Screener
I use the StocksToTrade platform to screen for low float stocks every day.
Each morning I run a scan for low float stocks with a major news catalyst, and I can some awesome potential trading setups.
That’s just one feature of the StocksToTrade platform. Grab a 14-day trial for just $7 and see how StocksToTrade can make your trading day easier.
#3 Focus on Low Float Penny Stocks
If you have a small account, you probably want to focus on the lower end of the stock market — penny stocks. These stocks trade for less and are largely ignored by Wall Street.
That means with penny stocks, your competition is often less prepared … And these stocks can make massive price moves up and down. There’s a lot of opportunity if you know what you’re doing.
6 Things Beginner Traders Want to Know But Are too Afraid to Ask…
I want every trader to feel comfortable asking about anything trading related.
We all start out as beginners. And some trading concepts can be tricky to wrap your head around.
Here are six questions and answers inspired by what newbie traders frequently ask me.
#1 What Is Market Capitalization and How Do I Calculate It?
Market capitalization (market cap) is a fancy term that effectively means ‘the entire value of a company.’
You determine the market-cap by taking the current share price and multiplying it by the total amount of shares that the company has outstanding.
For example, imagine company XYZ has a $20 share price and 10 million shares outstanding.
Market cap = $20 x 10 million shares = $200 million
The market cap of XYZ is $200 million.
#2 How Does Market Capitalization Relate to Stock Price Changes?
As a rule of thumb, small market-cap companies are more volatile in price than large-cap companies. Again, they have the potential to move 10%, 20%, or more in a single day.
Think of Microsoft or Google. Both have market caps of almost $1 trillion. They’re behemoths. We generally won’t see these kinds of huge companies making massive price moves in a single day.
Large-cap companies are often widely diversified, making revenue and profits from all kinds of niches and business areas. If one area of the company has a hard time, often the rest of the company can pick up the slack, and the company can still make a profit overall.
On the other hand, small-cap companies often aren’t diversified. They might have just a single product to sell. These companies are often early in their life-cycle and trying to develop and grow.
If that company suddenly finds out that it can sell 10 times the amount of its product — maybe because of a new law or hot sector — the stock can quickly increase in value by a large margin.
That’s why active traders love trading small-cap and penny stocks, they’re volatile and can make quick gains…
In terms of ownership, each outstanding share represents the same piece of a company. Where the types of outstanding shares differ is with what owners can do with them.
For instance, shareholders can’t sell restricted stock. But the floating stock can be freely traded. As an independent trader, you’ll probably never own restricted stock.
What’s more important here is that you know how to calculate the float of a stock, which will help you to know what kind of volatility and price action to expect. Make sure to study up on the formula I shared earlier in this post.
#4 How Volatile Is Too Volatile?
This is a great question that I love to hear from newer traders.
It shows that the trader is thinking about the risk in a trade, and in particular, the risk that comes with trading volatile stocks.
Answering the question isn’t so simple, though.
Volatile stocks can be amazing when you know what you’re doing. But the can cut you into shreds if you don’t have a solid trading strategy. It’s OK to sit and watch the action in a volatile market if you’re just getting started. Learn from the volatility. What we’ve seen in 2020 is incredible.
In general, the more volatile a stock is, the lower the position size you should be trading. You should also be placing wider stop-losses and profit targets since you can expect prices to move around a lot.
You should also look at the trading volume of a stock. Make sure there’s enough volume traded each day for you to quickly get in or out of your shares at any time.
In general, it’s great to trade highly volatile stocks, but be sure to focus on your risk management.
#5 Could the Number of Floating Stocks Increase?
A lot of restricted stock is restricted because the owners of those shares are legally obligated to continue holding them. Maybe it’s the company founder who promised to hold onto a large number of shares for five years after the IPO or key employees being paid in stock and salary.
Eventually, these restricted stockholders will be legally allowed to sell. And if they do, those shares will then be counted as floating stock.
Should you worry about the float of a company and check it constantly? No, keep it simple, stupid … as I like to say.
Personally, I let the StocksToTrade screener track stock floats for me. It’s super quick and easy. Check it out with a 14-day trial for just $7 here.
#6 When Isn’t a Company Low Float Anymore?
If we go by the rule I shared earlier in this post, once a stock has a float of more than 20 million shares, it’s no longer low float.
Let’s say you trade a low float stock off and on for a while … Then you notice it’s up to 30 million floating shares. Should you stop trading it?
It depends on the stock, how it’s moving, your trading plan, your strategy, and so much more. In trading, as in life, not everything is black and white.
If the stock has great trading setups, you should still trade it. But be aware that this stock is on the path to no longer being low float. You may eventually stop trading it.
Use StocksToTrade to Find Low Float Stocks to Trade
I hope you’re excited to trade low float stocks. They can provide some of the best trading opportunities you’ll ever find in the stock market.
Before you jump in the deep end though, make sure you’re equipped with the right tools to compete in the modern markets…
StocksToTrade is the trading platform created BY traders FOR traders. We constantly work to make it better. We add new features all the time — like the Breaking News chat, social media filters, and so much more.
See why some of the best day traders in the world use StocksToTrade. Get your 14-day trial for just $7 today.
I know many successful traders who only trade low float stocks. They can offer huge potential for monster price moves.
I’m not saying you should ignore every other type of stock, but you should definitely know the stock float and how to use it for finding awesome trading opportunities.
And if you’re ready to step your game up and join a community of highly-driven traders, come and join us in the SteadyTrade Team community. We dig into all things trading every day!
Do you love trading low float stocks as much as I do? What do you focus on? Tell me below in the comments!