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What are floating stocks?

Floating stocks are used to control the volatility of share prices in public markets.

After private companies get listed on the markets post an IPO, they issue fresh stocks for retail investors to buy and trade in. However, even after a company becomes public, it has control over the number of shares that can be traded on the market.

This control is exercised using floating stocks, which is the topic of this article. Today, we’re going to explore the concept of floating shares in public markets and understand why companies float their shares according to market conditions.

Understanding floating stock

Floating stock, also known as free float, is the number of a company’s outstanding shares that are available for public trading. This metric is distinct from the total number of issued shares, as it excludes shares held by insiders, such as promoters, or those that are otherwise restricted from public trading.

Note: Floating shares = Total outstanding issued shares – restricted stock – management-held shares – shares held by insiders – ESOPs.

Essentially, floating stock is the amount of stock that you, as a retail investor, can theoretically buy up in the public markets. Hypothetically, once you hit the floating stock ceiling, you can no longer buy any more shares without approaching company insiders.

Here are some things to note about floating stock:

  • A higher floating stock indicates a greater number of shares available for public trading. This leads to improved liquidity in the market, and more accurate and efficient price discovery.
  • Increased liquidity allows for smoother buy and sell transactions for you, which reduces the impact of individual trades on the stock’s price. Hence, generally speaking, the more shares a company floats, the more stable its share price gets.
  • This, in turn, promotes a more accurate representation of the stock’s true market value.

Stocks with a lower floating stock tend to be more susceptible to price volatility, as a small number of investors can have a disproportionate influence on the stock’s price. For instance, a particularly big buy order for the stock by an institution or a hedge fund could modify the share price itself, causing violent fluctuations.

How is the float decided?

According to NSE, the average floating stock of companies listed on the Nifty 50 index was approximately 61% as of March 2023. However, there is significant variation across sectors and individual companies. 

For instance, the information technology sector had an average floating stock of 72%, while the consumer goods sector had an average of just 52%.

This essentially means that in the tech industry, companies usually float an average of 72% of their total issued stocks in the public markets while consumer goods float around 52%. While theoretically this means that tech stocks should be more stable than consumer stocks, this is not always the case. Volatility depends on several other factors like industry growth, major events, investor sentiment, risk profile, and macroeconomic conditions also.

Why this is important to you

Here are some reasons retail investors must be familiar with the concept of floating stock:

  • Liquidity – Floating stock directly impacts the liquidity of a stock, which is an important consideration if you’re planning on trading large quantities of stock, especially for small cap companies.
  • Commissions and fees – Stocks with higher floating stock also tend to have more active trading, narrower bid-ask spreads, and lower transaction costs, making it easier for you to enter and exit positions.
  • Governance and ownership structure – The level of floating stock can also provide insights into a company’s ownership structure and corporate governance practices, which are important metrics during fundamental analysis and bottom-up investing.
  • Regulatory compliance – This is another important metric you should consider when investing in a large company for the long-term. For your information, the Securities and Exchange Board of India (SEBI) has set a minimum public shareholding requirement of 25% for listed companies.

Frequently Asked Questions

How can investors use floating stock data?

Investors can use floating stock data to assess the liquidity and potential price volatility of a stock. A higher floating stock generally suggests greater trading volume and more efficient price discovery.

What is the significance of the minimum public shareholding requirement in India?

SEBI’s minimum public shareholding requirement mandates that listed companies must maintain at least 25% of their shares in public hands. This regulation aims to enhance market transparency and protect minority shareholders.

How does floating stock affect a company’s valuation?

A higher floating stock can positively impact a company’s valuation, as it indicates greater liquidity and the potential for better price discovery. Conversely, a low floating stock may result in a valuation discount due to perceived liquidity risk

What are the implications of promoters increasing their stake in a company?

When promoters increase their stake in a company, the floating stock typically decreases, which can lead to reduced liquidity and increased volatility.

How can companies increase their floating stock?

Companies can increase their floating stock by issuing new shares post-IPO, or reducing promoter shareholding by IPO.

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