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What Is Stock Float?

"The Float" is used a lot in investing circles. Read on to learn more about the term and its importance.
The Float Lead

Read on to learn all about what stock float is.

What Is “The Float”?

The float is a term used to describe the number of shares a company has available for public trading. As an investor, you’ll hear “the float” referenced a lot.

It may seem overwhelming at first to learn a slew of new financial concepts when starting out in investing, but in reality, it’s pretty simple once you learn a few key terms. It’s kind of like learning a new language: once you have a few basic words down, you can build on that knowledge easier and faster.

Four Key Investing Terms You Need to Know

Learn the brief definitions of these key terms in order to comprehensively understand “the float”.

  1. The Company Treasury
    Each corporation has a “treasury” that holds any securities the company may have. Securities are a tradeable financial asset. Shares are considered a type of security, and are held in the company’s treasury until issued elsewhere.

    Shares used to be strictly physical securities (a paper you could hold in your hands); today, however, many shares are digital securities (a digital representation of that paper).

    Key Points to Remember:
    • Shares are a type of security that can be in digital or physical form
    • Shares are stored in a company’s treasury until issued elsewhere
  2. Authorized Shares
    When a company is first incorporated, the new shareholders must determine the total number of shares their company will have. These are called “authorized shares”, and are kept in the treasury until issued elsewhere.

    The number of authorized shares never changes (unless a vote is held later by all shareholders to increase or decrease the number of authorized shares). 

    Key Points to Remember:
    • Every new corporation must decide how many authorized shares they will have
    • The sum of all of a company’s various shares equals the number of authorized shares
    • The number of authorized shares never changes, unless the shareholders decide by vote to increase or decrease the number at a later date
  3. Outstanding Shares
    This term is used to describe the total number of shares that have been issued outside of the company treasury. If it's not in the treasury, it's outstanding. 

    There are two main categories of issued shares:
    1. Public Shares: Shares issued to the public market and available for public trading. A public share can be bought, traded, or sold at any time by anyone in the public.
    2. Restricted Shares: Non-transferable shares issued to insiders, executives, or employees as a form of compensation. A restricted share cannot be bought, traded, or sold publicly.

    A restricted share is actual ownership of stock, however, it comes with restrictions on the timing of its sale. The two main restrictions are:
    1. Timing: Conditions related to the timing of the sale of these shares.
    2. Vesting: A “vesting” period can last for several years (either until the employee has worked for the company for a certain amount of time, or until the company reaches a certain benchmark); once the vesting period is over, the restrictions are removed.

    Key Points to Remember:
    • Outstanding shares are any shares that have been issued out of the treasury
    • Outstanding shares include both public and restricted shares
    • A public share has no restrictions
    • A restricted share has restrictions on the timing of its sale

  4. The Float
    Finally, we get to our main goal: the float! This term is actually very simple. It describes the total number of shares a company has issued for public trading.

    What if after being issued to the public, a public share is bought/traded/sold? It doesn’t matter. It still counts as a public share that has been issued outside of the treasury.

  5. Key Points to Remember:
    • The float is the number of public shares a company has issued out of its treasury
    • All public shares issued outside of the treasury count as the float; it doesn’t matter how many times they are bought/sold/traded
    • Restricted shares are not included in the float count

An Example of “The Float” in Real Life

Let’s imagine a real-life example of the float in easy-to-understand terminology.

It’s 1971. The company “Starbucks” has just been incorporated. At the time of its incorporation, the 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 A

First, the ten Starbucks 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:

             Public: There are (so far) zero outstanding shares issued to the public.
             Restricted: There are now 1,000,000 outstanding shares that were issued to                 the shareholders.

Float: There are zero outstanding public shares, so the float is at zero.

Total Authorized: 10,000,000

Total in Treasury: 9,000,000

Total Outstanding: 1,000,000

Total Float: 0

Shares Snapshot B

Next, the shareholders decide to issue 7,000,000 shares to the public for trading. They will 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).

TheStreet Dictionary Terms

Treasury: There are now 2,000,000 shares in the treasury that have not been issued yet.

Outstanding:

             Public: There are now 7,000,000 outstanding shares that have been issued to               the public.

             Restricted: There are still the 1,000,000 outstanding shares that were issued                 to the shareholders.

Float: There are 7,000,000 outstanding public shares now, so the float is at 7,000,000.

Total Authorized: 10,000,000

Total in Treasury: 2,000,000

Total Outstanding Shares: 8,000,000

Total Float: 7,000,000

Shares Snapshot C

After a decade of running the Starbucks business, 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:

             Public: There are now 14,000,000 outstanding shares that have been issued                 to the public.

             Restricted: There are now 2,000,000 outstanding shares that were issued                 to the shareholders.

Float: There are 14,000,000 public shares now, so the float is at 14,000,000.

Total Authorized: 20,000,000

Total in Treasury: 4,000,000

Total Outstanding Shares: 16,000,000

Total Float: 14,000,000

Fun Float Facts

  • Most new start-ups choose to initially authorize around 10 million shares.
  • 10 to 20 million public shares are considered to be a smaller float. Some companies have billions of public shares.
  • The bigger a company’s float, the more stable its stock. This is because when the float is bigger, there’s more stability when large chunks of shares are bought or sold.
  • The smaller a company’s float, the more volatile its stock. This because when the float is smaller, there’s more volatility when large chunks of shares are bought or sold.
  • Restricted shares are often issued as a kind of compensation to incentivize employees or executives by giving them a stake in the company’s stock.
  • Restricted shares are also issued to insiders after merger, acquisition, or underwriting activity to help prevent premature selling of stocks (which could cause volatility for the company).
  • Restricted shares were invented after the stock market crash of 1929 as a way to help stabilize the market.
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