In the stock market, free float is a key term every investor should understand — especially when evaluating market liquidity. Many beginners often wonder: what exactly is free float, and why does it matter when choosing stocks?
By understanding free float, you can better identify liquid stocks and avoid unnecessary volatility. Gotrade breaks down everything you need to know in this complete guide.
What Is Free Float?
Free float refers to the number of a company’s shares that are publicly available for trading in the market. These are shares not held by major shareholders such as company founders, executives, or institutions with long-term positions that rarely sell their holdings.
According to the Corporate Finance Institute, free float represents the “active” shares traded daily on the market. The higher a company’s free float, the more liquid its stock tends to be — meaning it’s easier for investors to buy and sell without major price swings.
Free Float vs. Outstanding Shares
Outstanding Shares
This figure represents the total number of shares issued by a company — including those owned by founders, management, and institutional investors. It covers all shares in existence, whether publicly traded or not.
Free Float
Free float is a subset of outstanding shares — it only counts the shares actually available for trading in the public market. Shares held by insiders or long-term institutional investors are excluded, as explained by Investopedia.
Example:
Suppose a company has 1 billion outstanding shares. Of those, 600 million are held by founders and institutions, while 400 million are available to the public. The company’s free float is therefore 400 million shares, or 40% of total outstanding shares.
Why Free Float Matters
1. Market Liquidity
A higher free float generally means higher liquidity — the stock can be bought or sold easily without large price fluctuations. Conversely, low free float stocks can be harder to trade since fewer shares are available in the open market.
2. Price Volatility
Low free float stocks are typically more volatile. Because fewer shares are circulating, even small trading volumes can cause big price movements. Stocks with higher free float tend to be more stable and predictable.
3. Index Weighting
Major stock indexes like the S&P 500 use free float to determine a company’s weighting in the index. Companies with a larger free float have greater influence on overall index performance.
4. Market Transparency
A healthy free float helps prices reflect true market value, since they’re shaped by a broad base of active investors — not dominated by a few large shareholders.
Free Float Examples in the U.S. Market
Apple (AAPL)
Apple has a massive number of outstanding shares and an extremely high free float. As a result, it’s one of the most liquid stocks in the world, traded millions of times daily with very tight bid-ask spreads.
Berkshire Hathaway (BRK.A)
Unlike Apple, Berkshire Hathaway’s Class A shares have a limited free float and extremely high price per share (hundreds of thousands of dollars). That makes them thinly traded despite Berkshire’s enormous market cap.
Tesla (TSLA)
Tesla’s free float is relatively large, but strong investor demand often makes it volatile. This shows that while free float improves liquidity, market sentiment can still drive sharp price swings.
Low Free Float Stocks
In the U.S., many family-owned or small-cap tech companies have low free floats because most shares remain with founders. Such stocks can skyrocket on hype — but also crash just as fast.
What Free Float Means for Investors
Investment Risk
- Low free float: Higher volatility, greater potential for sudden price swings.
- High free float: More stable movement, often better suited for long-term investors.
Trading Strategy
- Active traders may prefer low free float stocks for short-term opportunities, since price spikes can yield quick profits — though with higher risk.
- Conservative investors typically favor high free float stocks for smoother price action and better liquidity.
Market Perception
Companies with very low free float can appear less transparent since ownership is concentrated among a few large holders. This often deters institutional investors who prefer open and liquid markets.
Practical Tips for Understanding Free Float
- Check the free float ratio: Compare it with total outstanding shares to gauge how much of the stock is actually tradable.
- Avoid illiquid stocks: A very low free float can lead to wide bid-ask spreads, making trades difficult.
- Use free float as a risk indicator: The smaller the float, the higher the potential volatility.
- Review index weightings: Stocks with large free floats often play a bigger role in major ETFs and indexes.
Conclusion
Free float represents the portion of a company’s shares available for public trading — unlike total outstanding shares, which include all issued stock. It’s a crucial metric for assessing liquidity and volatility.
Stocks with large free floats are generally more stable and transparent, while those with small floats can be riskier but offer short-term trading opportunities.
Understanding free float helps investors strike the right balance between liquidity, volatility, and potential returns.
FAQ
1. What is free float in stocks?
→ Free float refers to the number of shares available for public trading, excluding those held by major shareholders or long-term institutions.
2. Why is free float important for investors?
→ Because it affects liquidity and volatility — the higher the free float, the easier it is to trade, and the more stable the stock price tends to be.
Disclaimer:
Gotrade is the trading name of Gotrade Securities Inc., which is registered with and supervised by the Labuan Financial Services Authority (LFSA). This content is for educational purposes only and does not constitute financial advice. Always do your own research (DYOR) before investing.
