Investing in stocks can be a profitable way to grow your wealth over time. However, it’s important to understand the various metrics and terms used in the stock market to make informed investment decisions. One such term is “free float” – read on to find out what it means!
What Is A Free Float?
The term “free float”, aka public float, refers to the company’s shares available for trading in the secondary market by the general public.
What You Need To Know About The Free Float
As you can see from the free float definition, it is important to be familiar with this metric, as it can provide investors with an idea of how easily they can buy or sell a particular stock. The free float can be calculated using the following formula:
Free Float = Outstanding Shares – Restricted Shares – Closely-Held Shares
Here, the outstanding shares represent the total number of company shares that have been issued.
The closely-held shares are owned by a small group of shareholders, such as family members or business associates, while the restricted ones belong to insiders like company executives and large shareholders. These shares are not freely available for trading in the secondary market and are therefore excluded from the free float metric.
A higher free float indicates that a company’s stock is more liquid, which means that there are plenty of shares available to trade, and the stock price is likely to be more stable. This is because a larger free float reduces the impact of large buy or sell orders on the stock price.
On the other hand, a lower free float can make a stock more volatile. However, remember that the free float mustn’t be the only indicator that’s taken into account when making investment decisions, as there are multiple other critical factors to consider.
Also, note that the free float can change over time. For example, if a large shareholder decides to sell their shares, the free float would increase. Conversely, if a company decides to buy back its own shares, this metric would drop.
