Buying Stocks : Float

As part of my continuing educational series on investing in the stock market, I will talk about the float today. The float is the number of shares held by the general public (shares outstanding). For instance, as of this writing, Google (Symbol: GOOG) had 311.5 million shares outstanding.

It’s important to know the float when buying stocks. Here are a couple things to keep in mind with higher and lower floats.

Stock with a high float:

Since there are many shares, it’s considered less volatile. It has a greater ability to absorb bad news.

Earnings are more diluted, which can mean it takes a lot more for the stock price to rise.

If the stock price is extremely small, 10 cents per share for instance, a high float doesn’t mean as much as a stock with a share price of par ($100).

Stock with a low float:

There are fewer shares, so it’s considered more volatile. Bad news could send the stop spiraling downward.

However, a lower float can also have the opposite effect on good news—the stock can rocket upward.

Earnings are more concentrated, so good earnings can have a better impact and send the stock higher.

Remember, the market is all about supply and demand. A stock with a low float that gets some great news and receives great coverage can shoot upward fast. Meanwhile, a stock with a high float with the same news, price and coverage can tick up slightly. The stock with the higher float needs greater demand to see the same results.

And now a great example of float—Google vs. Yahoo.

As mentioned above, Google has a float of 311.5 million shares. Its rival, Yahoo (Symbol: YHOO), has 1.3 billion shares outstanding.

For Yahoo to see the same share increase as Google, the demand has to be four times greater. Ah, but wait. Google is trading at almost 22x higher than Yahoo. And that’s why the float is just one piece of the equation.

On a share-by-share basis, Yahoo does need 4x the shares bought to match Google. However, on a capital-by-capital basis, Yahoo can actually receive 5.5x less in capital demand to match Google, because Yahoo is trading at 22x less than Google and Yahoo has 4x the amount of shares outstanding.

Revenue Forecasting

For many investors who do their own homework and projections, the float is very important, and here’s how to use it.

Suppose a company you’re interested in receives a lucrative contract that will add $200 million in revenue to the company. If you don’t pay attention to the float, you might think that sounds good enough for you to pull the trigger and invest in the company.

Now, what if you saw that the company was trading at $150 per share with 900 million shares outstanding. Are you as excited? How about if the company had just 50 million shares outstanding?

As an investor who does his or her own homework, the float is a mandatory piece of information that you must know. As you invest, you may develop a “taste” for stocks that meet certain float conditions—high or low.

Source: http://www.financialrebel.com/training/buying-stocks-float/

Blues Comments: Thanks Mel for your research and sharing this…This is a very good article for  understanding the Float.


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