What to Look Out for When Investing in Low Float Stocks
Out of a number of factors like growth, return, risk, float, and liquidity, traders look at the float of stocks closely when deciding their picks. They prefer low float stocks due to various reasons. What are low float stocks and is trading in low float stocks a good strategy?
A float of particular company stock is defined as the regular shares that the company has issued to the public. To arrive at this figure, you need to subtract restricted stock and closely-held shares from a company’s outstanding shares. Restricted shares usually aren't fully transferrable until certain conditions are met.
Why is float important for traders and investors?
The figure is important for investors since it determines the number of shares that can be bought or sold by the general public. A company’s float isn't constant and keeps changing due to various market conditions like a new issue, share sale, or purchase by insiders.
What are low float stocks?
A low float stock is one with few outstanding shares. This could happen if a large portion of the stock is owned by employees, executives, and institutional investors. Usually, a low float is one with a float percentage of 10 percent or lower, although some traders might not go below 25 percent.
Playing with volatility in low float stocks
Compared to high float stocks, low float stocks have a higher bid-ask spread and higher volatility. The high volatility in these stocks can present opportunities to buy and sell shares and make some quick money. This is why day traders for stocks and options like low float stocks. Institutional investors usually prefer high float stocks since they can buy or sell a large number of shares without influencing the price much.
Things to watch when investing in low-float stocks
Investing in low-float stocks isn't without risks. The price changes in low-float stocks might not always go in your preferred direction. There are a few things you can incorporate when considering buying low-stock shares.
Relative volume: The relative volume is the stock’s current volume compared to its trading volume in a previous period. This variable can have a significant impact on a stock’s liquidity. A lower liquidity along with a low float could be very tricky. Traders might be stuck with shares they can’t sell.
News catalysts: A low float stock could have a dramatic reaction to positive or negative news. Day traders could look for the price reaction of stock to past news and how often the stock gets influenced by such news.
Float percentage: Each trader has his own preference regarding the float percentage, but the preferred range is 10 percent–25 percent. Other things to consider are how often the company’s float changes, how long has it been that size, and why the float is so low.
While high float stocks are a good bet for long-term investors, if you're highly risk-tolerant and are looking at quick bucks, you could go for low float stocks.
If you're looking for low float stocks, the first stop could be lowfloat.com. You can filter by exchange and also focus on low floats with high short interest. Other popular watchlists are Reuters’ Free Scanner and Trade Ideas.