There are lots of different terms used in finance that you might not be familiar with, unless you are immersed in this world.

The terms used in business finance can be even more confusing, and you might find yourself constantly wondering what they mean. 

One term that you may have heard of is “float”.

“Float” is a word with lots of different meanings, and this can make it tricky to know what it means in terms of business.

If you want to find out what “float” means, then you are in the right place. 

In this guide, we’ll be taking a look at what “float” means, and everything that you need to know in relation to this.

So, if you want to find out more, keep on reading!

What Is Float?

First things first, let’s take a look at what a float is. In terms of business and finance, the term float is used to refer to regular shares that a company has issued to the public that are free to trade among investors.

Regular shares are another name for common stock, and this style of shares are ordinary shares which can be bought by investors. 

The float is calculated by taking the figure of outstanding shares that are left, and subtracting any stock which is restricted.

As the name suggests, restricted stock is stock that has been held from sale due to some sort of sales restriction (such as stock that is in a lock-up period). 

You might be wondering why floats exist. Well, the reason for this is very simple.

Float indicates the number of shares in a company that are actually available for purchase.

In order to invest in a business, there has to be shares available to buy.

If there aren’t any shares available, then you will not be able to add that business to your portfolio. 

When you are looking for companies to invest in, you may look at the float of each company to identify how many shares are available to the public for purchase.

From the float, shares in the company can be purchased through the secondary market.

So, these shares can be traded publicly without the company being responsible. 

Now that we know what a float is, let’s take a further look at how it works. 

How Does Float Work? 

So, a company’s float is the amount of shares that they have available for public purchase.

We have said that the float is calculated by subtracting restricted stock from outstanding stock. But let’s take a look at what makes a stock restricted. 

A restricted stock is a stock that is tied up and unavailable for purchase. Most of the time, restricted stock will belong to employees of the company.

Large companies often give employees stocks and shares of the business when they have worked there for a certain period of time.

This stock will often be restricted as most businesses put restrictions on the sale of this stock.

For example, employees may be unable to sell their stock for a certain period of time (i.e., 5 years). 

The number that remains is the company’s float. The float is important because it influences how volatile the stock is.

If there is a large amount of stock available, the value of the stock might drop due to supply and demand.

Likewise, if the size of the float is very small, the value of the available stock might skyrocket. So, float works by looking at what stock is available for sale.

Why Does Floating Matter?

Why Does Floating Matter

Now that we have taken a good look at what a float is, let’s take a look at why floating matters.

The float of a business is important not only for the business itself, but for investors as well.

A business can use its float to analyze how well they are doing, and what backing they have from investors.

But the float is even more important to potential investors. 

Any potential investors of a company can utilize the float to look at the company’s structure.

The float can tell you a lot about the ownership of a business, and how much control there is over the business.

From the float, you will be able to back-calculate how many shares are owned by those within the business by looking at the restricted shares.

This will allow you to identify how heavily impacted the value of shares will be by the insider shares. 

Generally though, the float is just a very useful tool to get a quick idea of whether, or not, a company is a good investment opportunity.

So, you should always check the float before you decide to purchase shares in a business. 

The Difference Between Float, Authorized, and Outstanding Shares

Before we wrap this up, let’s take a quick look at how the term “float” differs from some other similar terms in business.

Throughout this guide, we have also used the terms “authorized” and “outstanding shares”.

So, let’s quickly take a look at the difference between these and the company’s float. 

As we have said, a company’s float is the number of shares that are available for purchase by the public.

This figure is calculated by taking the outstanding (available) shares figure, and deducting the figure of restricted shares. But what are authorized shares?

The authorized share figure is decided when a company is founded.

All of these shares do not need to be allocated upon creation, and so, there can be some crossover between authorized and outstanding shares.

This is why both authorized and outstanding shares may be included in a company’s float. 

Summary

In short, a company’s float is a figure that represents the number of shares in that company that are available for sale to the general public.

This figure is calculated by deducting the number of restricted company shares from the number of outstanding shares.

This figure can be used by both the company itself and potential investors to analyze the business ownership structure, and to see if it is a good investment. 

Thank you for reading!