JAKARTADAILY.ID - When making investment decisions or putting together a portfolio, investors or fund managers usually consider liquidity into account.
There are several reasons why liquid equities outperform less liquid ones. Liquid stocks, for example, have market values that reflect the company's basic development.
One of the variables that influence the liquidity of shares on the stock market is the number of outstanding shares or floating shares.
The importance of floating stock
A floating share, also known as floating stock, is the number of shares of a certain stock that are open for trade. Stocks with a low float have a small number of shares. Floating stock is calculated by deducting closely-held shares and restricted stock from a company's total outstanding shares.
Closely-held shares are those controlled by insiders, large shareholders, and employees. Insider shares that cannot be exchanged due to a temporary restriction, such as the lock-up period following an initial public offering, are referred to as restricted stock (IPO).
The float of a company is essential for investors because it reveals how many shares are really available for purchase and sale by the general investing public. In most cases, a low float is a barrier to active trading. Because of the lack of trading activity, it may be difficult for investors to enter or exit positions in companies with minimal float.
A corporation may have a significant number of shares outstanding but just a small amount of floating stock. Assume a company has 50 million outstanding shares. Large institutions control 35 million of the 50 million shares, management and insiders own 5 million, and the employee stock ownership plan (ESOP) owns 2 million.
As a result, the floating stock is only 8 million shares (50 million shares minus 42 million shares), or 16 percent of the existing shares.