How Much Do You Really Know About This Kind of Stock?
In this issue, I’m going to go over Low Float Stocks, and how you can benefit from them.
In terms of float, low can be the way to go when it comes to trading penny stocks.
In case you’re scratching your head, let me clarify: I’m not talking about the huge slow-moving floats like you see in the Macy’s Thanksgiving Day Parade. In the stock market, “float” refers to the number of shares of a stock that are available to the public for trading.
Low float stocks tend to offer lots of volatility which means that they can spike in big ways that can potentially net you profits.
However, trading low float stocks can also present a high level of risk, so you have to know what you’re doing. I’ll tackle that in this issue.
Here, I’ll offer an introduction to low float stocks — what they are, how you can benefit from trading them, and some of the best indicators and tips for how to get started with them.
What Are Low Float Stocks?
Not to be roundabout, but before you can understand low float stocks, you need to understand a little something called shares outstanding.
The shares outstanding refers to all of the shares of a company’s stock. This includes shares held by all shareholders, including what are called “restricted shares,” which are held by company insiders/officers and big blocks of shares held by institutional investors.
If you’re looking at a company’s balance sheet, you can find the number of shares outstanding listed by the heading “Capital Stock.”
The shares outstanding are an important piece of the puzzle when calculating a company’s market capitalization and earnings per share (or EPS).
So there are the shares outstanding, which include the restricted shares that wouldn’t readily be available to traders like you and me.
Then, there’s what’s called the “float.”
What are Float Shares?
The float refers to the number of shares that are freely available for trading.
Even if a company has a massive amount of shares outstanding, if many of them are held by insiders, they aren’t necessarily tradable for people like you and me.
If the number of shares available for other traders is fairly low, the stock is said to have a low float.
There isn’t a specific number that denotes a low float. Traders might have their own standards for what constitutes a low float. For instance, some might consider a stock with 10–20 million shares that are freely available for trading a low float stock.
Here’s the thing about low float stocks: they don’t have a ton of supply. This means that any catalyst that causes demand (or lack thereof) will have a larger effect on the shares that are available. In plain English, this means the stock is more volatile.
Wait, so is this good news or bad news for traders? A little bit of both, because this simultaneously raises the risk, but also the potential rewards.
Let’s talk about the risks first.
Risks of Low Float Stocks
The volatility that is inherent to a low float stock means that it can have rapid moves in either direction.
Since there are pretty few available shares, the supply and demand can be impacted quickly and drastically based on news (good or bad).
Because of this, these stocks are ripe for fraudulent campaigns like the “short and distort,” so it’s always important to perform both fundamental AND technical analysis on the stocks and to dig deep to determine the validity of press releases and news.
Adding to the risk factor, low float stocks are more common for micro- or small-cap companies. These companies aren’t as established as large-cap companies and tend to have more volatility and risk inherently.
So, the low float simply compounds this risk.
Rewards of Low Float Stocks
The good news is that just about everything that makes low float stocks risky also makes them potentially rewarding as well.
Because these stocks can have big moves, as a trader you can grab potential opportunities if you can predict or get ahead of the trend.
While news is generally a catalyst for movement in a low float stock, if you’re intelligent about keeping watchlists, conducting both fundamental and technical analysis, and identifying hot sectors, you can potentially benefit.
There are two key indicators that you should check before trading low float stocks.
I’ll go over those with you in the next issue. Take a little break tomorrow — we’ll pick back up on Monday!
— Tim Sykes
Editor, Penny Stock Millionaires