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Low Float Mania : What to Look for in Stock Supply and Demand

By June 14, 2018Trader Tips
Low Float Mania : What to Look for in Stock Supply and Demand

Low Float Mania 

As traders, what we want, first and foremost, in a stock is rapidly accelerating prices, from which we can make a profit. This means paying attention to the ‘float’.

The ‘float’ refers to the freely tradable shares. Keep in mind that some of these stocks will have shares owned by employees or directors, and often those shares will be locked up so they can only be sold at certain times of the year, or after certain periods of time. These shares would not be available.  

Right now, we have been in what STT lead trainer Tim Bohen calls a period of “low float mania”, and it’s all about supply and demand for those of you who’ve had basic economics courses.

In today’s market, if a stock has less than 10 million freely tradable shares, think about it as a hot day on the beach with only a limited supply of lemonade: in other words, everyone is going to want it. Tight supply and strong demand is a recipe for high prices.

As Tim noted in a recent podcast on STT’s SteadyTrade, “When you’ve got a low float stock that is up big on the day and is very liquid, has lots of trading activity, and has a news event as a strong catalyst, the buyers will be there. And when there are more buyers than there are shares available, prices should accelerate rapidly.”

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For those of you with less experience, STT rookie trader Stephen Johnson puts it another way: “If I owned a lemonade stand and I only had five pitchers of lemonade (he said ‘pots’, but he’s British so we’ll let it slide) and it’s a particularly good batch of lemons imported after a lovely summer in the UK, and everyone wants it … I’m going to fetch top dollar for it, and even more, as supplies dwindle. … Especially if I had just issued a press release about my state-of-the-art lemons.”

This is what’s happening: These low price tickers all want to get the price of their stock up. This is their ultimate goal. They want to issue more shares to fund their operations because almost all of these micro-cap companies are money-losing operations. They’re desperate for cash and they raise cash in the public markets by getting their stock prices up.

Keep in mind that as day traders, we’re interested in tickers, not companies. “Whether we’re long, whether we’re buying the stock, or whether or we’re short, we’re looking for the price to go down,” says Tim.

But the beauty of low-priced stocks—especially low float stocks—is that if they get that press release out, there’s money to be made.

You need a powerful scanner to be able to sort through an estimated 16,000 stocks to find a low-priced stock that has low float and enough volume. You can get from 16,000 down to as few as five or fewer in a day with STT.

It’s just like the lemonade, says Tim. It’s not healthy for you if you squeeze one lemon and add a cup of sugar. You need the pure lemons, no sugar added.

STT’s Float Primer

So now that you have the bigger picture of why we like low float stocks, here’s your homework: Familiarize yourself with these basic day-trading definitions, and put them to use when you try out STT’s scanners:

Float: The float in stocks is basically the number of shares available for trading a particular stock. The number is calculated by subtracting closely-held shares and restricted stocks from the total outstanding shares. Keep in mind that a company can have a huge number of outstanding shares but still have a very limited float.

Closely-Held Shares and Restricted Stocks: The closely-held shares are those held by company insiders, employees, and major shareholders. The restricted stocks are those held by insiders and which cannot be traded. The reasons for the restrictions may be that there is a lock-up period following an IPO (initial public offering), among other things. Once the temporary restrictions are lifted, these shares can ‘float’.

Low Float Stock Risk: There is always a risk to low-float stocks, which are usually micro-cap companies because they can be very volatile. With fewer shares available to trade, supply and demand are impacted more radically—especially when there’s a big news catalyst. But this is exactly what we’re looking for at STT.

Share Buybacks and Splits: Share buybacks decrease the number of outstanding shares, making floating shares as a percentage of outstanding shares lower. A share split will increase floating shares, while a reverse split will decrease floating shares.

Here’s an example:

Company: Just issued an IPO

Shares outstanding: 1 billion

Executives and Insiders: 600 million (restricted for 180 days due to the IPO lock-up period)

1,000,000,000 – 600,000,000 = 400,000,000 (floating shares).

Calculating floating shares is easy enough, but finding the right stocks to start calculating is quite a different challenge. That’s where STT comes into play, with dynamic filters that do it all for you and narrow 16,000 possibilities down to a handful, making sure you hit at the low-float mania backed up by all the other criteria you’re looking for, including big percent gainers, liquidity, and catalysts.

It’s a learning curve, but we’re right there with you, and for STT Pro members, lead trainer Tim Bohen’s there every day to share his strategy and walk you through the indicators and fundamentals.

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