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What is Float Rotation and Why It Matters to Day Traders

Tag: stock float

Float Rotation

Float rotation is a reference to the amount of times a stock’s entire float, or available shares, is traded during a single trading day. It typically occurs on lower float stocks that are trading with exponential volatility. It was coined by Nate Michaud, a professional day trader and purveyor of InvestorsUnderground.com.

What is a Stock Float?

If you’re new to trading and need to understand what a stock float is, be sure to check out our tutorial on the impact that stock float has on trading.

As a quick recap, a stock’s float is the available shares to publicly trade that are not restricted, owned by insiders of a company, or generally closely-held by institutions.

The Formula

Imagine a small cap company (ABC) has 20 million shares outstanding. Company employees and management own 5 million shares. That leaves 15 million shares.

In addition, hedge funds, pension funds, and other institutions may have closely-held shares in the amount of 10 million. This leaves only 5 million shares available to trade.

We would consider 5 million to be the stock float. It’s what is left to buy and sell by the general public.

What is Float Rotation?

Now that we have an understanding of floating stock, in general, let’s take it a step further.

The small cap company we mentioned above, ABC, normally only trades about 10,000 – 20,000 shares per day. Very low volume.

Let’s say ABC is priced somewhere around $3.

However, there is something brewing within company ABC: a product, a sales deal, a collaboration, an FDA approval, something that is PR worthy.

Early one trading day, the company releases the news and suddenly the stock price gaps up in the premarket on heavy volume. By 9:30am the stock is trading at $5/share and has already reached 5 million shares in premarket volume.

What has happened?

The free float was only 5 million shares to begin with. It has traded 5 million shares already on this day. Therefore we would say that the float has rotated 1x times already.

The Impact of Float Rotation

Generally speaking, the volatility of a security’s price movement is inversely correlated with the size of its float. The lower the float, the more volatile a stock can become.

Let’s look at a few examples of this.

Here we have a snapshot of AAPL with over 16 billion shares available in the float:

AAPL Chart High Float
AAPL Daily Chart

Over the course of a month, AAPL moved about 18%. Not bad, all things considered.

But let’s compare AAPL to a stock with a float of 17 million shares.

EYES is a great example:

EYES low float daily chart
EYES Daily Chart

In contrast to the slower, steady movements of AAPL, EYES ran over 2000% in just 4 days. Granted, there was likely a catalyst — some news or event — but the point remains, that the lower the float, the more volatility can occur.

The Intraday Rotation

Continuing with the EYES chart above, let’s zoom into the action on the first large volume day that launched the stock.

What we find is that EYES had traded over 17 million shares before the market opened at 9:30am. That means it had rotated the float at least once.

EYES premarket float rotation chart
EYES trading through the float in the premarket

As Nate Michaud points out, what occurs when when a stock’s float rotates is that we have a “refresh” of shareholders, especially as a stock begins to squeeze higher and higher.

It’s a lot like a Ferris wheel. Some traders jump on for the ride, some jump off. But there are only so many seats on the Ferris wheel. And whoever is in control, bulls or bears, get to determine the direction of the spin.

To better understand, let’s look at all the times that EYES rotated through its float during that big day.

EYES float rotation intraday
EYES float rotation intraday

For each vertical line you see on this 1 minute chart, EYES has traded over 17 million shares. By 12:30pm that day, EYES had traded 22x the float. Or, it had rotated the float 22 times before 1pm.

That is a lot.

For AAPL to do that, it would have to trade 4 x 1010 shares in a single day.

You do the math.

By the end of the day, EYES had traded over 700 million shares — nearly 7x its market cap in a single day. Insane volume.

What Does It All Mean?

At this point, you’re probably wondering what significance float rotation has.

If you don’t trade the high stakes world of low float stocks, it may not impact your trading as much. As a concept in and of itself, it just means a lot of shares were traded that day.

However, it becomes important contextually if you are trading this type of security.

Why? It all depends on the setup and your bias.

We talk about this in more detail as part of our Guide to VWAP Boulevard. If you have time, it is worth a read.

Suffice it to say that that if you are a short biased trader who thinks EYES is too overbought as it goes from 100% to 200% to 1000% on the day, you may want to pay attention to float rotation before you decide to go short.

Think of it like “reverse FOMO.” Bears are afraid they’ll miss out on the top.

Stock Market Fomo Meter

For that reason, every 5 minutes or so, there is a complete refresh of the shareholders day trading this stock. Remember the Ferris wheel analogy?

Shorts are getting blown out, and covering. Then new ones are adding in again, only to get blown out. So forth and so on. The bulls are in control and taking the bears for a ride in a direction they don’t want to go.

By the time they’re let off the Ferris wheel, it’s too late. They’ve run out of carnival tickets to go for another ride.

Now, this is a bit of a generalization, but for all intents and purposes, when you see a stock float rotating this rapidly, you either want to be long, or you want to step aside.

It can be dangerous business riding the low float Ferris wheel with the bulls.

Factors That Can Affect Float

There are a handful of things that can affect the float of a stock, but only one that is particularly influential on float rotation.

Share buy backs, stock offerings, insider lock-up expirations, and stock splits are a few ways a float can be affected. Heavy institutional ownership can also create volatility if big funds decide to liquidate their shares.

Regardless, the most important to watch for in day trading is usually the company offering.

Offerings

Many times smaller cap companies will take advantage of PR campaigns, product releases, or news events to raise money for the company. What better way to do this than dump more shares of their company into the hands of unsuspecting investors or traders?

These offerings typically happen during moments of high demand and momentum. For obvious reasons, the company wants the best price for their shares.

However, the impact on shareholders can be devastating.

For an example, have a look at this chart of COCP. What was a fantastic bull run on this day ended in a blood bath.

COCP momentum killed by offering
COCP momentum killed by offering

COCP was up over 180% on the day when the offering was announced.

Despite the float rotating violently throughout the day, all it took was a load of new shares injected into the market to kill the momentum.

We discuss this particular setup in our Kill Candle explanation. Believe it or not, these events can be anticipated to some degree.

Nonetheless, that is the modus operandi in low float land. Inflate the price, raise money, and leave the retailers holding the bags.

Keep that in mind.

How To Find Float Data

There are more than one ways to find float data. Yahoo! Finance has float data along with Finviz.com and others. Here is an example of the fundamentals you can find for free on finviz.com:

Finviz Float Data
Finviz fundamentals snapshot

Brokers typically have this data as well, if you subscribe to a platform with fundamentals data.

How To Practice Float Rotation

As with any trading setup or criteria, we recommend back-testing and visualizing your strategies in a realistic but safe environment first. There is no better way to do this than in a simulator.

At least take a sampling of 20 trades. This way you’ll know what your success rate is with that strategy before putting real money to work.

Good luck and stay safe in the market!

Stock Float Explained

Stock float is one of the most important metrics that can influence the price of a security. While it can be a confusing term to understand as a beginning trader, it is worth the effort to know. After all, it can mean the difference between big gains and big losses.

Why Stock Float Is Important

The more metrics you have to evaluate a security before trading it, the better. As a rule of thumb, anyway.

Perhaps you won’t be too concerned with a dividend if you’re only looking to day trade a specific stock. You won’t own the stock long enough for the dividend to matter.

But one metric that can dramatically affect a stock’s price movement and volatility, is the float.

Therein lies the importance of this numerical data.

The Role of Insiders

Of the number of shares that are tradable for any given security, those shares are either freely tradeable on the market or insider-owned shares that are locked up. That is, unless the insiders decide to sell more shares, which is another subject in itself.

For the most part, inside shares are owned by the employees of the company they work for. The insider owned shares are not easily tradeable as they come with restrictions. For that reason, the market at large doesn’t bother much about the insider owned shares.

On the other hand, free floating shares are owned and traded by general investors. Investors like you, perhaps.

Institutions

In many cases, institutions also own a majority of these publicly available shares. These institution-owned stocks are typically held for a long time. Examples of institutions include pension funds or hedge funds.

Because most institutional firms are not actively trading their portfolio every day, this leaves only a remaining portion of the overall shares of a company that are readily tradable.

What Is A Stock Float?

The float of a security measures the total amount of shares that can freely change hands. In many ways, it depicts the liquidity of the market for certain companies.

The more number of shares there are to change hands, the greater the liquidity.

Calculating Stock Float

To better understand “floating stock,” let’s illustrate this with an example.

A company ABC Inc. has 100,000 shares outstanding.

Of the shares outstanding, 5000 are held by its employees, 40,000 shares are held by institutions. The remaining shares are held by regular investors.

From this, the stock float is 55,000. This is the sum of the total outstanding shares minus the shares held by insiders and institutions.

Stock float explanation

As you can see, while the outstanding shares may be as high as 95,000 for this particular hypothetical company, the actual shares available at any given time, may be much lower.

Float Impact

The impact this has on stock prices and volatility can be dramatic. After all, it is supply and demand that dictate the prices of stocks.

To that end, if more and more institutions gobble up the oustanding shares of a company, it takes less and less demand for the price to rocket higher.

Scarcity of shares, as it were.

This is exactly what happens during the early period of a company’s publicly traded life.

Low Float Stocks

A low float stock as the name suggests indicates that the number of shares outstanding are low. For such stocks, the daily and average volume tends to be low. The low volumes of such stocks lead to volatility and as a result, wide bid and ask prices.

Before the company dilutes its value by throwing more shares into the market, the lower float in the beginning can cause its price to skyrocket as long as demand is there.

For such low float stocks, a fundamental driven rally creates demand. In other words, investors are stumbling over themselves to buy shares when they are scarce, driving the price higher in dramatic fashion.

Over The Counter Stocks

There is a myth that low float stocks are mostly stocks on the pink sheet or OTCBB market listings.

However, this is not the case. In some cases you can find some micro-cap stocks with listings on the main exchanges such as the NASDAQ or the NYSE. A stock can also be low float if for some reason the float reduces relative to its usual average.

While the definition is a bit flexible, a stock is considered a low float stock which has fewer than 50-100 million in tradable shares.

High Float Stocks

Stocks with a high float tend to be more predictable and less volatile. For all intents and purposes, you can expect a stock to be a “high float stock” with anything above 100 million available shares.

Due to the large number of shares in the float, the liquidity can absorb any big moves. Therefore, while it is common to see 30% or 40% or even 100% moves during a short amount of time in a low float stock, this is not often seen with high float stocks.

The lack of scarcity means the value is often at “equilibrium” with the amount of shares being traded. Thus it takes more effort to move the price.

Larger companies such as AAPL or FB are examples of stocks with high float.

Comparison Between High and Low Floats

To imagine the difference, lets take a stock with a float of 18 million and 23.5 million outstanding shares, and compare it with AAPL at 16.68 billion float and 16.75 billion shares outstanding.

EYES ran 1293% in just 4 trading days:

EYES 1293% small stock float example
EYES small float stock example

AAPL moves 18% in 38 trading days.

Large stock float example
AAPL large float stock example

Clearly, there is a difference. For most investors or traders, it is usually a safe bet to trade stocks that have a higher float.

Trading low float stocks can be lucrative in the short run, but they typically come with the headaches of volatility and a lack of secure fundamentals.

Market Cap vs. Free-Float Market
Cap

Market capitalization, or market cap for short, is closely linked to the free float of the stock.

When researching stocks, companies are usually categorized based on their market capitalization. Pull up any ticker on finance.yahoo.com or any other site, and you’ll see Market Cap at the top of the list, usually:

Yahoo Finance Market Cap for AAPL
Yahoo! Finance Market Cap for AAPL

The important question for traders, is whether you should pay attention to this.

Market cap is a measure of a company’s size: the total value of a company’s outstanding shares of stocks. These outstanding shares include publicly traded shares as well as restricted shares that are held by insiders.

How To Calculate Market Capitalization

To calculate market capitalization you simply take the number of a company’s shares that are outstanding. Multiply the shares outstanding by the current stock price in order to get the market cap of the stock.

Let’s illustrate this with a simple example.

Say a company ABC Inc. has a total of 5 million shares outstanding. If this company is trading at a stock price of $10, you can get the market cap by multiplying the shares outstanding with the stock price.

In this example, we get $50 million as the market capitalization of the company.

Within market capitalization, there are certain classifications. The different categories can vary depending on who you ask. However, market capitalization is broadly classified into the following:

Now that we understand what market capitalization is, we can see the difference.

Market cap is based on the total value of the company’s shares.

Float is the number of outstanding shares that are available for general trading by the public.

The Free Float Market Cap Calculation Method

There is also another measure called the free float market cap method of calculation. In the free float calculation method, the market cap excludes shares that are locked in. The shares that are locked in are inside shares that are not available for the general public.

Generally, the free float method of calculating the market cap is widely used. Major indexes such as the Dow Jones Industrial Average and the S&P500 make use of the free float method.

Free float and market cap are important metrics for investors. When combined together, these two values show the total available shares for the public to trade.

Stock Price Manipulation Through Float

One common question among traders is whether one can manipulate the price of a stock based on the float.

As mentioned above, a reduction in the float can almost immediately raise the price of a security. This might seem contrary to the notion of “higher the float, bigger the price.”

This is not the case however. For example, when risk averse investors are on the short side of the stock, reducing the float can squeeze these investors out of the market.

This research paper of Float manipulation and stock prices gives insight into how firms can expand or shrink the float. The researchers observe Japanese stock listings and the price impact of firms who reduce their float between 0.1% up to 100% for periods of one to three months.

The study concludes that the price of a stock tends to rise when the float is reduced and conversely, the price of the stock falls when the float is increased.

The returns of the stock are also said to be cross-sectionally related to the reduction in the float.

There is strong evidence that firms tend to issue equity or redeem their convertible debts when the float is low. After all, they want the highest price they can get for their shares.

For this reason, firms have strong incentives for manipulating the stock price via its float.

Can A Company Increase or Decrease Its Float?

The answer to this is yes. Companies can raise or decrease their float in a handful of ways.

  • A company can raise the float by issuing new shares and it can reduce the float by announcing buy back of its shares.  Other examples include a company announcing a stock split which could impact the float.
  • Insider activity is also one of the factors influencing the float. For example, insiders who usually own options can choose to exercise their option. This can also influence the float. However, for this to occur there needs to be a significant amount of option exercises.
  • A company can also increase its float by deciding to sell some of the inside shares. This is done for legitimate reasons such as raising cash, but there could also be ulterior motives.
  • Typically, you can see the float changing when there are some big changes. The trigger for the changes to the float can be due to the fundamental drivers such as news events or company reports and rumors.

Pros and Cons of Trading Low Float Stocks

As you might expect by now, there are pros and cons when it comes to trading stocks with a low float. For a more in depth look, be sure to check out our post on Float Rotation.

Let’s talk about the upside first!

Pros

Because low float stocks are volatile, there is a tremendous upside to the stock. Traders who can take a calculated risk on low float stocks could end up with big returns.

Despite the inherent risks, traders can find an occasional good trade with tremendous upside potential in low float stocks. One of the important things to look for is liquidity.

Cons

In many ways, trading low float stocks can be similar to trading penny stocks or micro-cap stocks.

Low float stocks can be very risky to hold because they can have violent moves in either direction. With so few shares available to trade, the impact on supply and demand can be significant.

Low float stocks can be easy to manipulate with large unexpected orders. This is something that investors need to bear in mind.

Stocks with low floats also tend to be volatile around fundamental news releases. These include any type of news that is related to the industry or the sector in particular. Liquidity also increases around such events which can give good opportunity for investors to exit the stock after making a good trade.

Be sure to check for any filings with the SEC as these companies tend to offer shares during price spikes.

How To Find Float Data

There are a number of services that offer float data. Yahoo Finance and Finviz are just a few of the popular ones. Popular charting platforms may offer this as well, usually with a subscription to fundamental data.

Here is a snapshot of some of the fundamental data that finviz.com provides free of charge:

finviz.com float data
finviz.com fundamentals data

Regardless of the service you use, you may find some discrepancies from one to the next.

Conclusion

Hopefully this helps fill in some gaps when it comes to stock float and the impact it may have on your trading.

As with any piece of information in the markets, it is always wise to study the context and historical examples. Here at TradingSim.com, we can help with this as we have the ability to filter your search for simulated trades based on float size.

Hopefully you’ll take the time to develop your playbook and decide whether you like the price action and risk of low floats or high float stocks.

Best of luck!