Benefits and Risks of Low Float Stocks—How to Get in the Game

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Aug. 18 2021, Published 2:16 p.m. ET

Investment strategies are all over the place, mainly because what works for one investor might not work for another. One of the strategies is trading low float stocks.

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Why do so many investors target stocks with low floats, and should you be one of them? The answers to these questions are multifaceted because there are benefits and risks tied to low float stocks.

What is a low float stock?

To understand the logistics of a low float trading strategy, you need to know what you're dealing with first.

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A "float" refers to the number of shares that a publicly traded stock has available or the outstanding shares.

A low float stock is one with few outstanding shares remaining. Most of the stock might be owned by employees, executives, and institutional shareholders. A stock's float refers to what an investor in the open market can buy or sell.

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Usually, a low float stock is one with a float percentage of 10 percent or lower, although some traders might not go below 25 percent.

Low float stocks move quickly.

Because low float stocks are tickers with few shares available to the general public, any change can impact the stock's price more dramatically than stock's with a higher number of outstanding shares.

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Price-changing factors include positive or negative company news, relative trading volume, and change in float percentage.

Opportunities in trading low float stocks

Day traders for stocks and options like low float stocks because they can take advantage of quick and broad price changes. Succeeding in a low float day trade isn't a given by any means. However, it's an opportunity that some adventurous investors like to strive for.

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low float stocks
Source: Unsplash

If you're going to trade low float stocks, you'll want to familiarize yourself with technical analysis. While business news does play a role in these stocks' movement, it isn't everything. Using tools like stop losses can help you mitigate risk. Setting data-backed profit targets could be helpful in identifying points of entry and exit.

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Meanwhile, you might want to incorporate the practice of identifying low float stocks with a high relative volume. These stocks reduce the risk of slippage (lowered bidding prices in day trading).

The risks of low float stocks are undeniable

While some investors view the volatility of low float stocks as a good thing, you can't deny the risk involved in playing with a volatile stock. Dramatic price changes won't always go in your preferred direction. Low float stocks are one of the trickiest types of investments to make as a day trader, and day trading is already pretty tricky.

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Long-term investors tend to stay away from low float stocks because the typical chart patterns don't align with their strategy. The value in these stocks is largely in the short term, although an institutional sell-off or share dilution could signal an in for investors.

If you're looking for low float stocks, the obvious first stop is lowfloat.com. You can filter by exchange and also focus on low floats with a high short interest.

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