Floating shares are the most liquid portion of a company’s equity.
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What Is “The Float” When It Comes to a Company’s Stock?
When it comes to a company’s stock, “the float” refers to all outstanding shares that are available for public trading. This includes all shares held by public investors but does not include “restricted” shares held by company insiders or treasury shares that remain locked away in a company’s treasury.
The more float (publicly tradable shares) a company has, the less volatile its stock price tends to be in the absence of other factors, and vice versa. This is because when a company has fewer public shares, the purchase or sale of many shares at once on the open market causes a more significant boost or decline in market price. In other words, more float means more liquidity, and more liquidity makes for smoother trading.
The number of float shares can change over time for a variety of reasons. For instance, many companies offer stock options to their employees as an incentive. Once these options vest, employees can exercise them for real shares. Once exercised, these shares are usually still considered restricted. After a certain amount of time, however, employees may be allowed to sell these shares on the open market, at which point they stop being restricted shares and start being part of the float.
The Float vs. Other Types of Shares: An Overview
To fully understand what stock float is and how it differs from other types of shares, it is necessary to understand where shares come from and how they can change over time.
In this context, the categories of shares it is important to understand are authorized shares, outstanding shares, restricted shares, and floating shares (the float). How many of each type exist can be found in the shareholders’ equity portion of a company’s balance sheet.
Authorized is the broadest category of shares and includes both treasury shares and outstanding shares. Outstanding shares includes both restricted shares and float shares.
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Authorized Shares
Authorized is the broadest category of shares—the one that includes all others. When a corporation legally forms by filing articles of incorporation or a charter with the government, it outlines the total number of shares its leadership has authorized it to issue. This is the maximum number of shares the corporation can legally issue unless its board of directors (or a shareholder vote) authorizes the issuance of additional shares in the future, which would dilute the value and voting rights of all existing shares held by existing shareholders.
Authorized shares include all un-issued shares held in a company’s treasury, including any that are slated to vest as employee options, as well as all shares outstanding, including both those held by company insiders and those held by the public.
Outstanding Shares
Outstanding shares are all shares that have been issued. Any shares that are no longer in a company’s treasury—whether they are held by company insiders, institutional investors, or the public—are considered outstanding. Outstanding shares are multiplied by the current share price to determine a company’s market capitalization.
Restricted Shares
Restricted shares are outstanding shares that are not considered available for public trading. This usually means they are held by company insiders who are not yet allowed to trade them on the open market. Most restricted shares that begin as employee stock options eventually become unrestricted and are then considered part of the float.
Floating Shares
Floating shares—AKA “the float”—are those that are considered available for public trading because they are not in some way restricted or closely held by insiders or investors with controlling stakes. Since floating shares are highly liquid, they are sometimes used in an alternative calculation of a company’s market capitalization instead of outstanding shares.
What Is Float-Adjusted Market Cap?
Float-adjusted market capitalization is a measure of a company’s size or value as determined by the market, but unlike traditional market cap, it is calculated using only floating shares instead of all outstanding shares.
Many consider float-adjusted market cap to be a more accurate measure of a company’s size/value when it comes to public trading. The S&P 500 (a popular bellwether stock index), for instance, weighs its component companies by float-adjusted market cap instead of traditional market cap in an effort to provide investors a clearer gauge picture of what stocks are actually moving the market.
Floating Shares Example and Walk-Through
In 1970, a fictional company called Acme Adhesives had just been incorporated. At the time of its incorporation, ten shareholders decide to authorize 10,000,000 shares for their company. These 10,000,000 authorized shares will sit in their company’s treasury until they are issued elsewhere.
Shares Snapshot 1
First, the ten Acme shareholders decide to issue 100,000 shares to each of themselves. That’s 1,000,000 restricted shares that have now been issued out of the treasury. Now how are their company’s shares counted?
Authorized: There are still 10,000,000 authorized shares because this number will never change (unless all of the shareholders get together and vote to authorize a change).Treasury: There are now 9,000,000 shares in the treasury that have not been issued yet.Outstanding-Restricted: There are now 1,000,000 outstanding shares that were issued to company insiders.Float: There are (so far) zero outstanding shares issued to the public.
Shares Snapshot 2
Next, the shareholders decide to issue 7,000,000 shares to the public for trading. They keep the remaining 2,000,000 shares in the treasury for a rainy day.
Authorized: There are still 10,000,000 authorized shares because this number will never change (unless all of the shareholders get together and vote to authorize a change).Treasury: There are now 2,000,000 shares in the treasury that have not been issued yet.Outstanding-Restricted: There are still the 1,000,000 outstanding shares that were issued to company insiders.Float: There are now 7,000,000 outstanding shares that have been issued to the public.
Shares Snapshot 3
After a decade of running Acme Adhesives, the shareholders unanimously agree that the number of authorized shares should be increased. They hold a vote amongst themselves to increase the company’s number of authorized shares from 10,000,000 to 20,000,000.
As soon as the vote is passed, the ten shareholders issue another 100,000 restricted shares from the treasury to each of themselves (1,000,000 total). They also issue another 7,000,000 shares from the treasury to the public.
Authorized: There are now 20,000,000 authorized shares after the shareholder vote to increase.Treasury: There are now 4,000,000 shares in the treasury that have not been issued yet. Outstanding-Restricted: There are now 2,000,000 outstanding shares that were issued to company insiders.Float: There are now 14,000,000 outstanding shares that have been issued to the public.
