Have you ever noticed companies with large bid-ask spreads? There is a significant difference between a stock’s buying and selling price. What is the reason behind this? When the amount of outstanding shares is low, there is less trading activity for the stock. This is called the floating stock. In turn, there will be more volatility in the stock price since there are fewer buyers and sellers. Finding an investor willing to buy or sell the stock at the given price becomes much more difficult. Trading with low-float stock can be tricky. We will take a deeper look at the implications of low floating stock. We will also look at a few companies with low floating stock and how their stock has been doing. One of them had a recent IPO via SPAC and has seen a lot of volatility since its market debut.
Before we go any further, we have to understand what shares are part of the floating stock. We need to take the total number of outstanding shares and deduct all the restricted and closely-held shares.
The former is under the ownership of company executives. They can’t be sold unless they are compliant with SEC regulations. The latter is held by insiders, major shareholders and company employees. They can also be shares that are locked up. They become available after a certain period has passed after the company’s IPO.
Let’s look at an example. Company A has 100M outstanding shares. 50M are owned by company executives, and 25M by insiders, major shareholders, and employees. That only leaves 25M shares as floating stock (25%). This is the number of shares available to the general public.
Low Float Stock Implications
Companies with less than 10-20M shares are considered low float. The company’s floating stock can be volatile due to limited shares traded at high bid-ask spreads. There is more risk for investors. Accurately valuing the company can become difficult since it goes through various price changes. Why does a company have a low float?
SPAC: Many companies skip some steps and merge with a SPAC instead of going through the IPO trouble. Usually, fewer shares are available because company executives own them, and fewer investors are interested in a SPAC. Some shares will become available down the road.
Family-owned: Family-owned companies own at least 50.1% of their business to own most shares and keep outsiders away. That already cuts the number of outstanding shares in half.
Fun fact: 33% of S&P and 40% of the 250 biggest French and German companies are family-owned.
Stock buybacks: Stock buybacks reduce the number of shares available to the public. They go back into the hands of the management. Just like dividends, stock buybacks reward shareholders. To learn more about stock buybacks, you can read our article about them.
Let’s look at the float shares of some of the most popular companies and what percentage they represent compared to their total outstanding shares.
Amazon, Apple, and Microsoft have most of their shares available to the public. Are they very volatile? They aren’t. In the next section, we will examine some companies with low floating stock and their stock market journey.
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Companies With Low Floating Stock
Pagaya Technologies is an Israeli company that went public in mid-June 2022 thanks to a SPAC. The company’s stock price lost over 70% of its value within the first 30 days. Since mid-July, shares increased by over 1000%. Every single day has been a roller-coaster with double-digit gains and losses.
What is the cause of this? Despite having 459M outstanding shares, Pagaya only has around 309K public float shares, which is extremely low. It is less than 1%. Day traders and investors took the opportunity to manipulate the stock’s price to generate daily returns.
It will take some time for the locked-up shares to be available to public investors. Is this floating stock a good investment?
Is Pagaya Technologies a Good Investment?
Let’s take a look at the numbers of this floating stock. As I write this, Pagaya has a total revenue of $475M and a market cap of $15.46B. The company is also still far from being profitable. I don’t see how long the stock will remain at current levels. Many are saying Pagaya has joined the ranks of other meme stocks.
As for the future, Pagaya’s business model has some potential. The company underwrites loan requests thanks to AI technology and then sells them to its partners. Pagaya takes very little risk and makes money from its technology thanks to the fees generated by its partners. Furthermore, interest rates have gone up quite a bit recently. This certainly affects the company’s short-term pipeline as fewer consumers request a loan. In short, Pagaya might be worth $15B, but certainly not anytime soon.
Data Storage Corp (NASDAQ: DTST)
Data Storage has been public since 2017. I am including it here as a floating stock since it has a history of volatility and big short-term price swings. You guessed it: its public float is also very low, although it is more significant than Pagaya’s. It is only 3.83M shares. Data Storage has had three major price swings since its IPO.
In January 2018, its price increased 754% in one week. In March 2018, it saw a 350% increase. Finally, between January and February 2021, it saw a 400% price increase. Despite all that, more than 40M shares were traded daily in the past.
Data Storage is not a company I’d invest in unless I could time the next sudden price increase. Its price is currently near an all-time low. It is an example among many others. If you time the purchase and the result is a multi-bagger, don’t be greedy and sell your position.
Final Thoughts: Floating Stock
To conclude, companies with low float have very few stocks available to the public. This number is generally below 10-20M shares. However, this isn’t the total amount of outstanding shares. In most cases, that number is significantly higher.
There are many reasons for low float. Sometimes, shares are locked until a certain period after the IPO. In others, company executives own them. Regardless, companies with a low float can be subject to price manipulation by a group of investors.
When other investors join the party, they sell their shares, and the price goes back down. I mentioned two examples of low-float stocks and their volatile price movement. This makes them difficult to day trade.