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It can be challenging for a trader to make money in a flat or volatile market like we are seeing lately. There must be a trend in place, whether up or down, to offer trading setups. Learning about nuances of the industry, such as what stock float is, can make it easier to take advantage of these trends and boost the odds of taking a winning trade.
Develop a Basic Understanding of Supply and Demand
Stocks will rise and fall in price based on supply and demand. If a positive news event develops regarding a public company’s products or services, it may entice traders to purchase shares. When more investors and traders are buying the current supply, it will raise the price per share. This can send the stock into an uptrend. In contrast, the share price for a public company’s stock will fall when bad news is released. Then, a significant number of traders could short the stock or investors might sell, moving the trend lower.
What Is Stock Float?
Understanding about supply and demand is essential. Additionally, learning about stock float is another critical factor. This can help a trader find the best stocks to trade.
When a company has an initial public offering (IPO), the company’s board of directors authorizes a specific number of shares. However, some of those shares may be locked-in or restricted.
According to the experts at SoFi Invest, an all-in-one investing app, “There are a number of reasons a company may have locked-in or restricted shares. One such scenario would be a company that has shares owned by certain investors and employees of that business that aren’t available for trade.”
For example, if a company authorizes 50 million shares, they may only allow 15 million of those shares to be traded. These 15 million shares are known as the current float. Those are the only shares available for investors and traders to buy and sell. In the future, this company can place more of the authorized shares into the float if they want to raise more funds.
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What Are the Benefits for Traders of Understanding Stock Float?
The current stock float available can play a significant role in the price action of a stock. Knowing if there is a high float or low float increases or decreases the odds of a winning trade.
- High Float: A high float stock has many shares available to trade. This is typically more than the 15 million share range. The volatility and price action is less with this type of float due to the abundant number of available shares. To move the price higher or lower, it takes more buyers and sellers.
- Low Float: Stocks with a low float usually have less than 15 million shares available to trade. A lower number can increase volatility. This means it doesn’t take as much buying or selling power to move the stock price up or down. This can result in more significant swings.
Focusing on stocks with a low float can offer a trader the likelihood of a larger price movement when they take a trade. With less supply available, it won’t take as many buyers or sellers to move the stock price up or down.
According to the experts at SoFi, “You can often find a company’s float on one of many websites that aggregate information on publicly traded stocks, such as MarketWatch, Yahoo Finance, and Finviz©.” Placing stocks on a potential trading list containing a low float helps increase the chance of shares moving in the right direction when a trade is taken.
Knowing how stock float can make a difference with price movement should help provide an edge for a trader who is trying to take profits out of the market.