What Are Low Float Stocks?

Low float stocks are shares of a company that are available for trading in the open market and are characterized by a relatively small number of shares outstanding that aren’t held by insiders, governments, or restricted investors who can’t trade them freely.

The “float” refers to the number of shares actually available for trading by the general public.

Key Takeaways – What Are Low Float Stocks?

• High Volatility
  • Low float stocks often experience high price volatility due to limited supply.
  • Makes them attractive for traders seeking quick, significant gains but also increasing risk.
• Manipulation Risk
  • The limited number of shares can lead to easier manipulation by large holders, which can affect price stability and trading fairness.
• Liquidity Challenges
  • Traders may face difficulties entering or exiting positions without impacting the stock’s price.
  • More enter-exit execution strategy involved.

Day Traders & Low-Float Stocks

The significance of low-float stocks for day traders lies in their potential for high volatility.

Given the limited supply of shares available for trading, any significant buying or selling activity can lead to more pronounced price movements compared to stocks with a larger float.

This can be particularly attractive to traders looking for quick, substantial gains.

Nonetheless, it also entails higher risk, given the price can move significantly against the position in a short period.

Reasons for Low Float

Maintain control

Founders can hold a larger ownership stake with a low float.

This gives them more control over voting rights.

Limit liquidity

This can make it harder for institutional investors to buy large blocks of shares and potentially reduce unwanted influence.

Increase Demand Relative to Supply

A low float means fewer shares are available for trading, which can increase demand relative to supply, potentially leading to higher stock prices if the company’s outlook is positive.

Price Volatility

A low float can lead to greater price volatility, which might be attractive to certain types of traders.

But are these “hot money” flows the ideal type of holder?

It can increase the risk of stock manipulation and make the stock more sensitive to large trades.

Insider Ownership and Stability

With a low float, insiders and founding members can retain a larger percentage of ownership.

This may better align with the long-term interests of the company and potentially lead to more stability in company leadership and direction.

Issuing a lot of shares publicly may lead to an outsider having a lot of control over the company without necessarily being the most knowledgeable about the business.

Strategic Partnerships or Acquisitions

Companies planning strategic partnerships or preparing for acquisitions may keep a low float to simplify negotiations.

Fewer shares on the open market can mean less complexity in changing control or ownership stakes.

Regulatory Strategy

In some cases, companies may keep a low float as part of a regulatory strategy to comply with or take advantage of certain laws and regulations (depending on the jurisdiction and specific industry regulations).

Early Stage Financial Strategy

Early-stage companies that go public might start with a low float as part of their financial strategy.

At first, it’s often just the founder, co-founders, or seed investors.

Then additional funding rounds.

Then the company might have an IPO and gradually increase the float through subsequent public offerings as the company grows and requires more capital.

Minimize Short Selling

A low float can deter short sellers since the limited availability of shares makes it more difficult and potentially more costly to borrow shares to short sell.

This can provide some protection against downward pressure from short selling activities.

Nonetheless, “being scared of shorts” isn’t usually a big reason for keeping the float low.

Related: Short Float

Low-Float Stocks in Quantitative Trading

In quantitative finance, analyzing low float stocks involves using various statistical and probabilistic models to assess the potential risks and rewards.

Factors such as liquidity, bid-ask spread, and potential for manipulation are important in these analyses.

Given their volatility, low float stocks are often subject to sharp price fluctuations that can be triggered by news releases, market sentiment, or speculative trading.

FAQs – Low-Float Stocks

What defines a stock as having a “low float”?

A stock is considered to have a low float when the number of shares available for public trading is relatively small.

This means a significant portion of the company’s shares is held by insiders/governments/entities that face restrictions in trading these shares freely.

Why are low float stocks considered volatile?

Low float stocks are considered volatile because the limited supply of shares available for trading can lead to larger price movements in response to buying and selling pressures.

Even modest changes in demand or supply can significantly affect the stock price due to the scarcity of shares.

What attracts traders to low float stocks?

Traders are attracted to low float stocks because of their potential for rapid and significant price movements, which can offer opportunities for substantial profits in a short period.

The prospect of high volatility and the chance to capitalize on quick shifts in market sentiment are key attractions – especially for day traders who heavily rely on volatility to execute their strategies.

What risks are associated with trading low float stocks?

The risks of trading low float stocks include:

• high volatility, which can lead to substantial losses as quickly as gains
• lower liquidity, which might make it difficult to buy or sell shares without affecting the price significantly; and
• the potential for price manipulation due to the small number of shares in circulation

Who trades low float stocks?

Low float stocks aren’t suitable for all types of traders.

They’re best suited for experienced traders/investors who understand the risks associated with high volatility and can manage their trades or investments actively.

These stocks may not be appropriate for long-term investors seeking stable returns or those with a low tolerance for risk.