Wat is Free Float?
Free float is an investor term that refers to the shares of a company that can be freely traded, without restrictions. When you as an investor want to know how many shares of a company are freely tradable, you look at the free float. For most companies on the AEX, that percentage is around 75 percent, but some companies are lower. That is often because the original founders still have a large interest in the company. Heineken is a good example of this.
For the investor it is attractive when a company has a relatively high free float. The volume of traded shares (English ”shares”) is then large, and buying (and selling) the shares is therefore also easier.
Key Concepts in Free Float
There are several important terms here: outstanding shares, restricted shares, and closely-held shares. The term outstanding shares refers to all shares that are owned by the shareholders of the company. Restricted shares are specific shares, which are usually owned by the company management. Closely-held shares are shares that are held for the (very) long term. Here too, it often concerns either insiders from the company or professional shareholders .
Example of Free Float
Let’s take a look at how free float actually works in practice. Suppose we have a company, ”company A”, which as a listed company has authorized 1 million shares. The company’s balance sheet states the following: the total ”outstanding common shares” amount to half a million. 50,000 of these are held by the CEO and CFO of the company, and another 80,000 are in cash. Based on the following information, we can say that the free float of company A amounts to 450,000 (500,000 – 50,000).
If we want to know the free float percentage of company A, we have to look at the percentage of the ”shares outstanding” that are freely tradable. In this case 450,000 / 500,000 * 100 = 90 percent.
How can the free float increase or decrease?
A company has quite a bit of influence on its own free float. There are several steps that management can take to increase or decrease the free float. For example, the number of restricted shares can be increased or decreased; additional shares can be sold; or a so-called stock split can take place. Buying back shares or reversing a stock split is another way to reduce the free float.
Why is the free float important for investors?
Investors can use the free float to motivate their investment choices. As a rule, stocks with a very small free float do not have the support of larger, institutional investors – this is often also a sign that they are volatile , and pension funds or banks prefer to stay away from them. In addition, these types of stocks often have a larger spread and the liquidity of the company is problematic, since the shares are only available to a limited extent on the open market.
An existing example: Tilday – a very volatile stock
Tilray (TLRY) is a Canadian cannabis company. At its IPO in 2018, it was one of the first cannabis companies to be traded on the NASDAQ. At the time of its introduction, the share price was still 17 dollars, but it rose explosively in the months that followed. In January 2019, it was even worth almost 100 dollars. The enormous daily price fluctuations caused NASDAQ to temporarily halt trading in the share on September 19, 2018. On that day, Tilray’s share price initially rose by 90 percent, before falling sharply, and eventually ending with a gain of 38 percent. The reason for this enormous volatility was Tilray’s small free float. The free float percentage was only around 23 percent. As a result, investors were only able to buy a relatively limited number of shares, despite the very high demand. Tilray’s bid/ask spread was therefore very high. Here we can see that the free float had a direct effect on the stock’s volatility – and thus the company’s attractiveness to investors.