Big companies such as Apple, Home Depot, and Coca-Cola have billions of shares outstanding, with millions trading daily. Investors can buy or sell them almost instantly. But not every company has such a stockpile of available shares, and some companies don’t have many shares at all.

What is a low-float stock?

A low-float stock is one that has relatively few shares available for trading. Because there’s not much of it around, a low-float stock can be difficult to buy or sell, and its price can swing wildly in a short time.

Float refers to the portion of a company’s shares outstanding that are freely available to trade or “floating” in the stock market. The float is a big factor in assessing a stock’s liquidity—its ease of trading—and its price volatility.

Shares of a company may be counted in various ways to determine the float.

Authorized shares

This is the total number of shares a company could possibly issue, which is typically explained in a company’s articles of incorporation. The number can be increased only by a vote of shareholders. A company with a greater number of authorized shares than outstanding has the flexibility to sell more shares in the future.

Shares outstanding

This is the number of shares actually issued or sold to investors. It includes shares owned by institutional investors such as banks and mutual funds, as well as restricted shares owned by company executives and directors, who can only sell the shares under certain conditions. Companies use shares outstanding to calculate earnings per share and any dividend distributions per share.

Floating shares

These refer to the number of shares freely available to trade in the stock market. This is shares outstanding, minus restricted shares held by insiders and employee stock ownership plan shares. Some investors also exclude shares owned by large institutional holders in their calculation of the float, while others include institutional holdings, because institutional holders periodically buy and sell stocks.

The size of a stock float can change over time, affecting the stock’s liquidity and volatility. Stock buybacks, secondary share offerings, insider buying or selling shares, and stock splits (or reverse splits) can cause the number of shares outstanding to change, and thus the float.

High-float vs. low-float

Most companies have a large or high-float, which attracts institutional investors because the shares are easier to trade with less price volatility. For instance, Apple has 16.53 billion shares outstanding, and 16.51 billion are in the total float. Consumer-products giant Procter & Gamble is similar: It has about 2.43 billion shares outstanding with 2.42 billion in the total float.

The float is often expressed as a percentage of the shares outstanding. In these examples, Apple and P&G have a float approaching 100%. But even excluding institutional holdings, the floats are still very large. About 58% of Apple’s shares are held by institutions, so a public float of 42% (insiders hold only a tiny fraction) is still about 6.9 billion shares. Similarly for Procter & Gamble, institutions own about 65% of the shares, so the remaining 35% is still a big float at about 840 million shares.

Many investors consider a low-float stock to be 10 million to 20 million shares, and many microcap stocks have even smaller floats. Relatively few companies can be described as low-float; most of them are commonly described as “penny stocks”—those trading for $5 or less.

Evaluating low-float stocks

The size of a stock’s float generally has an inverse relationship to price volatility;  low-float stocks tend to experience bigger swings in price. Low-float stocks also generally have low liquidity—not many shares traded daily on average.

Low-float stocks also have wider bid-ask spreads—the difference between the price a broker would pay to buy and the price demanded to sell—because brokers want to be compensated more for the risk of trading such stocks. By comparison, large-cap stocks typically have tiny spreads, no more than a few cents.

Consider the following low-float stocks: Cosmetics maker Revlon had a spread of 40 cents on a share price of about $10.60 on October 18. And PrimeEnergy Resources, a small independent oil and gas exploration company, had a spread of $3 on shares trading at about $65.

Because low-float stocks generally are more volatile, less liquid, and have wider bid-ask spreads, few institutional investors will buy them, even if the companies have promising businesses. Institutions are buy-and-hold investors; day traders, on the other hand, often buy and sell a low-float stock in the same trading day to capture an immediate profit, fearing the risk of holding the stock overnight and losing their profit the next day.

Here are few other examples of low-float stocks:

• Value Line Inc. (VALU).

  The publisher of financial markets research and newsletters has about 9.6 million shares, but 90% are held by insiders, leaving it with a float of fewer than 1 million shares.

• Data Storage Corp. (DTST).

  The provider of cloud-based data storage and security has about 6.7 million shares outstanding. Of those, 41% are held by insiders.

• Ontrak Inc. (OTRK).

  A provider of behavioral health and telehealth services, it has 19.2 million shares outstanding, about half of them in the float.

Relative volume

One sign of traders’ interest in a low-float stock is when the amount of trading increases, compared with the stock’s historical average daily trading. It’s called relative volume, and it’s a gauge of the stock’s liquidity—its ease of buying and selling. As trading volume in the stock increases relative to its recent average, investors may see an opportunity.

For example, average daily trading volume for Data Storage Solutions was about 1.4 million shares for the six months through mid-October 2021. On July 6, trading jumped to 6.8 million shares as the price swung 42%—between $5.80 and $8.24—before closing at $7.29.

The next day, July 7, Data Storage shares opened at $12.60 and closed at $9.68, as trading soared to almost 48 million shares. That means Data Storage’s float of about 4.2 million shares was traded almost 12 times in a single day.

On July 8, Data Storage announced it would be among companies making presentations at an investor conference on data recovery, and on July 9 it said it received $2.1 million from the exercise of warrants by current shareholders to purchase more shares.

Data Storage has since declined and traded below $4 as of mid-October.

News catalysts

News about a low-float company can have a very big, sudden effect on the stock price as demand for the shares rises while supply is scarce. Day traders, eager to jump on such price swings, watch the stock market closely and look for news about low-float companies to try to take advantage of the supply-demand imbalances.

The bottom line

Low-float stocks tend to be relatively few in number. Those that are low-float have lower trading volume, less market liquidity, wider price spreads, and more volatility. These qualities may appeal to day traders, who can keep close tabs on the stock market and breaking company news throughout the trading day. They hope to profit from wide price swings, though they also are exposed to the risk of large losses. Many large institutional investors, however, are often long-term holders and avoid low-float stocks for those reasons.