What Are Low Float Stocks?

Many factors influence stock prices and how quickly they move up and down. While a company's financial performance and macroeconomic forces play large roles, investors should also pay attention to volume. Stocks with lower volume and a smaller number of shares can exhibit more volatility than others. Knowing how low-float stocks work can help investors generate higher returns and hedge their portfolios.

What Are Low Float Stocks?

Typically, traders consider a float between 10 million and 20 million shares as low.

Buyers and sellers may be difficult to find with fewer shares available. That can mean bigger price spreads and decreased trading volume. Stocks with high market caps tend to have more float than micro-cap stocks.

The larger price spreads of low float stocks may mean increased volatility. For that reason, these stocks hold appeal for day traders who look for sharp price fluctuations to capture fast profits. However, profit guarantees don't exist with these stocks. In fact, volatility can end up as a trap for traders.

News events often cause low float stocks to make big moves. That's true on both the upside and downside, meaning traders must use caution. The stock can move quickly in the opposite direction.

You should watch for patterns or setups on a chart when considering a position in a low float stock. Holding overnight may add risk. You may want to opt for quick exits to minimize exposure to news or other events that could serve as catalysts for large price fluctuations.

How to Find Low Float Stocks

You can identify a stock's float on a firm's balance sheet. In the shareholder equity section, you will find the number of the company's shares outstanding as well as the floating shares.

Many stock screening software tools allow users to filter for stocks with a low float. This is useful for day traders seeking securities with the potential for a fast gain.

You can set parameters for characteristics such as:

• Trading volume
• Total shares outstanding
• Floating shares

How Low Floats Stocks Work

The term "stock float" refers to the number of shares available for the public to trade.

It excludes insider holdings as well as restricted shares.

For example, let's say a company has 50 million shares outstanding, which isn't the same as its float.

At most companies, not all shares end up available on public markets. For example, many corporations offer restricted shares to managers and employees as part of a compensation package. These shares can't be sold until a specified date. That means a stock's float may be much smaller than its market capitalization.

Float can be a concern for big institutional investors, who typically look for liquidity. Even with lower float stocks, significant institutional ownership tends to dampen volatility. That's because institutions like banks, mutual funds, hedge funds, insurance companies and others typically hold longer and cannot trade in and out as quickly as individual investors.

When institutions own most of the float, the stock price tends to be less volatile.

Low Floats Stocks Relative Volume (RVOL)

Trading volume refers to the number of shares changing hands during a particular timeframe, such as during an hour, day, week or even a month.

It's a measure of liquidity, which indicates how easy it is to find a buyer or seller for the opposite side of your trade.

Relative volume is a ratio that indicates how volume in different time frames stacks up against one another.

For example, let's say you're looking at a stock that averages 1 million shares traded per day over the past month. Today, you notice that 3 million shares have moved.

In this case, the RVOL indicator is 3, as the stock is trading three times the average volume. Look for an RVOL greater than 1.5 or 2 to indicate big interest in the stock.

Types of Low Floats Stocks

Low float stocks have a smaller number of shares available for trading relative to other stocks.

Types of low float stocks include the following.

Biotechnology Stocks

Numerous biotechnology firms operate with a low float due to their early-stage development and the limited number of shares available for trading. Consequently, these stocks can exhibit high volatility and substantial price fluctuations in response to news regarding drug trials or FDA approvals.

Small-Cap Stocks

Small-cap companies typically have fewer shares outstanding when compared to larger corporations. This translates to low float stocks with a smaller investor base, resulting in heightened volatility and swift price changes.

Penny Stocks

Shares priced below $5 often possess a low float. These stocks may attract speculative trading and can experience significant price swings due to limited liquidity and the high ratio of shares traded compared to the overall float.

Niche Technology Stocks

Companies in specialized tech sectors, including cybersecurity and artificial intelligence, may have a low float, especially if they are startups or have not penetrated broader markets yet. Their innovative offerings can generate heightened interest and increased volatility.

Recent IPO Stocks

Newly listed companies frequently experience a low float at the outset since they might retain a considerable number of shares for future issuance or have lock-up windows for insiders. Once these shares are released for trading, it often results in rapid price movements and surges in investor interest.

Importance of Low Float Stocks

When considering whether to buy a stock, it's important to look at the float, which indicates the number of shares available for the general public to trade.

For traders wanting to take a large position or act quickly, low float may be a hindrance, as sparse activity in a stock often makes it tough to enter or exit at the price you want.

Low float is typically an impediment to active trading. This lack of trading activity can make it difficult for investors to enter or exit positions in stocks that have limited float.

Big institutions that make up the bulk of trading throughout the market generally steer clear of low float stocks because of this limited liquidity. These institutions also don't want the large price fluctuations that often accompany low float stocks.

Big institutions such as banks, hedge funds, mutual funds or university endowments demand liquidity and a more predictable pattern of bid-ask prices. In practice, this means low float stocks are often the purview of day traders and a very small number of institutional holders.

Mutual funds, pension funds and insurance companies that buy large blocks of stock invest in companies with a larger float. If they invest in companies with a big float, their large purchases will not impact the share price as much.

Recommendations for Trading

If you understand the potential for risk in low float stocks and decide to trade in that arena, check out these tips:

• To determine a stock's float, find the total number of shares outstanding and subtract the number of closely held and restricted shares.
• Start small and learn how low float stocks behave before putting more of your money at risk.
• Keep a list of stocks with chart patterns that seem suited to a big move.
• Avoid holding low float stocks overnight, as you may subject yourself to big price fluctuations and wipe out any gains.
• Plan your exit before you buy. Have a target price and a stop-loss price.
• Watch for news events that could drive upside price action on stocks on your list.

Pros and Cons of Low Float Stocks

As with any other investment or trade, low float stocks have pros and cons.

Pros

Higher Volatility Potential

Low float stocks generally show greater price fluctuations compared to those with a higher float. As a result, significant price movements can occur over short spans, offering traders opportunities to capitalize on these swings for potential returns.

Increased Risk of Price Manipulation

With their restricted supply, low float stocks are more vulnerable to price manipulation tactics. This scenario can benefit informed investors who can predict price shifts triggered by minimal trading activity.

Possibility for Quick Gains

When a low float stock captures attention—whether through media buzz, earnings announcements, or social media trends—it can witness dramatic price surges. This prospect of quick gains is appealing to both short-term traders and investors seeking immediate profits.

Limited Competition

Institutional investors and analysts may often overlook low float stocks due to their smaller market size or trading volumes. This tendency creates an advantage for retail investors, allowing them to uncover undervalued stocks before larger entities enter the fray, potentially leading to lucrative investments.

Growing Interest from Retail Traders

Low float stocks tend to garner heightened interest from retail traders, particularly during bullish market phases. This surge in attention can escalate demand, which in turn drives up stock prices and opens pathways for profitable trades.

Cons

Higher Volatility

Low float stocks are typically more volatile, as even minor trades can trigger significant price changes. This heightened volatility can lead to sharp price swings, posing risks for investors who might not be equipped to handle such instability.

Restricted Liquidity

With fewer shares available for trading, low float stocks generally face lower liquidity. This limitation can complicate the buying or selling of shares without greatly affecting the stock’s price, potentially creating challenges when trying to enter or exit positions.

Greater Risk of Price Manipulation

The scarcity of shares in circulation makes low float stocks particularly vulnerable to manipulation tactics, such as pump-and-dump schemes. Unscrupulous parties may artificially drive up prices, leaving investors at risk of substantial losses when the price inevitably drops.

Lack of Institutional Support

Institutional investors often steer clear of low float stocks due to their associated risks, resulting in a lack of research coverage and visibility. The absence of institutional endorsement may further erode investor confidence, amplifying price fluctuations.

Higher Spreads

Low float stocks commonly exhibit wider bid-ask spreads, a consequence of lower liquidity. This situation means investors might have to pay more when buying shares while receiving less upon selling, ultimately affecting overall investment performance.

Market Capitalization Related to Stock Price

Generally speaking, stocks with a small market capitalization show more volatility than larger peers. Some small-cap stocks can move 20% or more in 1 session.

You can find a stock's market capitalization by taking its share price and multiplying that by the number of shares outstanding.

For example, let's say a company's shares are priced at $10 and it has 30 million shares outstanding. That gives it a market cap of $300 million.

Apple (NASDAQ:AAPL) has a market cap of more than $2 trillion. It's rare to see Apple's stock make a huge intraday price swing.

A stock is typically considered a small-cap if it has a market cap between $300 million and $2 billion. Those stocks are often more volatile than a big company like Apple.

Penny stocks, which trade at very low prices and aren't typically widely owned by big institutions, are prone to wide intraday price changes.

That can benefit traders who move fast and capture gains. However, those price fluctuations can also harm traders who get swept up in a downdraft.

Best Brokers to Find Low Float Stocks

These are some of the top brokers to consider for low float stocks.

Getting Started with Low Float Stocks

Low float stocks offer traders an opportunity to nab intraday profits. By developing a watch list of stocks set up in potentially constructive chart patterns, you can jump in before a big move. At the same time, volatility and the potential for wide price swings may bring both pros and cons to traders. Exercise caution when trading low float stocks. You may want to avoid holding for too long or risk getting shaken out in a sharp downturn.

Frequently Asked Questions