Shares outstanding are the total number of shares issued by a corporation. Float is the percentage of those shares that is in the hands of investors and can be freely traded. Comparing the two can give you valuable clues about a stock’s potential performance and help you select the best trading candidates.
When a company incorporates, it authorizes the total number of shares it can issue. For example, XYZ Corporation can be authorized to issue up to 300 million shares. Companies rarely issue all shares at once. They may grant some stock to officers and directors, sell some in an initial public offering and keep the rest to raise more capital in the future, fund retirement benefits, grant employee stock options or use as currency for acquisitions.
Shares Available for Trading
XYZ Corporation can have 100 million shares issued and outstanding but only 50 million of it available for trading. Officers and directors may be long-term holders or have restrictions on stock sales; shares in retirement accounts only come to market when an employee leaves the company and sells his shares. When analyzing a stock, traders look at the float relative to the total number of shares outstanding as well as who owns it.
When float is much less than total number of shares outstanding, it suggests that insiders – officers and employees – own a large percentage of the stock. This is usually a good sign because you know that the insiders believe in the company and their interests lie with yours, for the stock price to go up. On the other hand, heavy insider selling can drive a stock price down, at least temporarily. When float is virtually identical to shares outstanding, you know you don’t have to fear insider selling – they have already sold. On the other hand, if insiders no longer own the stock, they don’t have the same interests as you, caring more about how much money they can get out of the company than what they can do to boost the stock price.
Increase in Shares Outstanding
When institutions own most of the float, the stock price tends to be less volatile. On the other hand, if its stock is in demand with institutions, a corporation can issue additional stock in a secondary public offering, increasing both shares outstanding and the float. The new supply of shares coming to market may push the stock price down, at least temporarily.
Video of the Day
- The Boston Institute of Finance Stockbroker Course: Series 7 and 63